No stopping the pound

In complete contrast to the wishes of the Bank of England who want to keep a lid on the value of the pound in order to stimulate exports and aid the economic recovery in the UK, the recent better than expected data out of the UK continues to bolster the pound which is now trading at either multi-month high’s (against the euro and the US dollar) or multi-year high’s (as against the Canadian and Australian dollars).

Yesterday saw the Society of Motor Manufacturers and Traders (SMMT) report that UK car manufacturing grew by 7% in July with year-to-date volumes up by 1.9%, signalling expansion in the sector as the economy improves.

Mike Baunton, SMMT’s interim Chief Executive said “We are starting to see slight signs of recovery from Europe which will support stronger production levels this year, and UK manufacturers will continue to build and develop innovative, high-quality products that appeal to a global customer base.”
Meanwhile, Martin Weale, one of the inflation ‘hawks’ on the Bank of England’s (BoE) Monetary Policy Committee (MPC) said yesterday that he “certainly envisages circumstances in which it would be sensible to undertake further asset purchases” saying “I would hope the recovery is well entrenched, but anyone who thinks the future will unfold smoothly is not taking account of everything that has happened in the past five years.”

The significance of his comments are that it was Weale who at the last MPC meeting dissented and voted in favour of shortening the period of time applicable to the inflation ‘knock-out’ clause which was approved by the MPC.

The minutes of the last meeting of the MPC showed agreement to hold the bank rate steady until unemployment in the UK falls to 7% so long as, amongst other conditions in the MPC’s view, it is more likely than not that the CPI measure of inflation 18 to 24 months ahead will be 0.5% or more above the 2% target.

Weale also commented on the recent rise in UK money market interest rates saying that markets were taking the view that either the recovery will be faster than the Bank expects so the unemployment target will be met sooner or that productivity growth will not return in the way the Bank foresees.

There was a further boost to the economic ‘bulls’ who believe that the world wide economic outlook is improving with HSBC reporting that growth in China's huge manufacturing sector showing signs of stabilizing as activity moves into expansionary territory. In fact, HSBC expect some upside surprises to growth in the coming months.

The HSBC China manufacturing purchasing managers' index (PMI) for August shows a rise from July’s reading of 47.7 to 50.1. A reading of 50 is the dividing line between expansion and contraction in activity.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said “China's manufacturing growth has started to stabilize on the back of modest improvements of new business and output. This is mainly driven by the initial filtering-through of recent fine-tuning measures and companies’ restocking activities, despite the continuous external weakness. We expect further filtering-through, which is likely to deliver some upside surprises to China's growth in the coming months.”