March flash PMIs in the Spotlight

OVERNIGHT

Asian equity markets mostly fell in a volatile session partly offsetting the week’s gains. The market move was attributed to renewed concerns about the global banking sector among investors, despite US Treasury Secretary Yellen preparing to take further steps to protect deposits. US Treasury yields fell, although the US dollar stabilised after recent declines.

THE DAY AHEAD

UK data released overnight showed GfK consumer confidence rise to a one-year high of -36 in March from -38 in February, but it is still weak from a historical perspective. Official retail sales were also released this morning and showed a 1.2% rise in headline sales volumes (including fuel) in February, a stronger outturn than forecast. High inflation has nevertheless impacted on sales volumes, with year-on-year sales down 3.5%.

Preliminary UK March flash PMIs will provide a timely update on economic trends and whether these are continuing to prove stronger than expected following the upside surprise in February (composite PMI rose to 53.1). We note that some of the move last month was possibly due to special factors such as unusually mild weather but nevertheless expect the composite PMI to hold above the 50 no-change level for the second month in a row, signalling expansion. Specifically, we look for services to move down to 52.7 from 53.5 and manufacturing to rise to 50.2 from 49.3.

PMI reports in both the Eurozone and the US will also be watched for further signs of improvement. We forecast slight rises in the Eurozone manufacturing and services PMIs to 48.8 and 53.0 respectively. We see US manufacturing and services PMIs rising to 47.8 and 51.0 respectively. US durable goods orders for February are forecast to rise by about 1.7% partially offsetting January’s big headline fall.

MARKETS

Sterling fluctuated after the BoE’s decision yesterday to increase interest rates by 25bp to 4.25%, an outcome that was substantially priced in by markets. It was the smallest hike since June and suggests that interest rates could be close to a peak. Nevertheless, the BoE signalled that the door remained open to further hikes if needed to reduce inflation. Markets have fully discounted one further quarter-point hike by June. The pound rose to 1.23 against the US dollar but has softened overnight. The euro was also lower overnight against the dollar, reversing some of its recent strength which reflected hawkish ECB rhetoric.