9 November 2016

The week in review

Thursday 3rd November was termed by some as Super Thursday in the UK as markets were shaken each way by a raft of news and data pointing towards the health, both past and future, of the domestic economy.

by James Godrich

Fund Manager


News came in the form of rates being held steady by the BoE and the High Court ruling that MPs should be allowed to vote on the triggering of Article 50. Data came in the form of the BoE’s forward expectations for GDP and inflation – which were both revised upwards – and the UK Services PMI survey.

The Markit Purchasing Managers Index (PMI) provides fact-based monthly data centred on surveys which track variables such as output, new orders, stock levels, employment and prices across various sectors. Against an expectation for the UK Services PMI to decline from the previous month’s 52.6 to 52.4, the data suggested a significantly healthier economy with a reading of 54.5; importantly, this was greater than the 50.0 level which separates a bullish from a bearish report.

The post Brexit economic resilience continues to surprise the markets and this report was no different. Activity in the service sector reported growth at its strongest rate since January, driven mainly by rising international demand from a weak pound and improved market confidence.

But as the weak pound gave with one hand it took away with the other and input price inflation surged to the highest level since March 2011. Another sign of business confidence though was shown as service providers passed on these higher costs and increased charges at the fastest rate since April 2011.

A simple demand-supply diagram would suggest that (dependent upon elasticities of demand and supply, of course) an increase in demand would cause an upwards and outwards shift in the demand curve thus increasin g both the equilibrium output and price levels. An increase in input costs would then cause an upwards and inwards shift in the supply curve, thus decreasing equilibrium output but again an increase in equilibrium price levels.

All eyes then on the next UK inflation data print due on November 15th.

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