Following a string of positive data out of the UK last week, traders are looking for the next piece of UK data to confirm or deny their prior beliefs as to whether the Bank of England will hike by 50bps in March.
While a 50bps hike by the BoE is not our base case, overnight index swaps are currently pricing in a 40% probability that this event will occur. Today’s PMI data is unlikely to dissuade the more hawkish traders within money markets as services activity exceeded expectations by a considerable margin and manufacturing activity held up despite expectations of a minor slowdown.
While diffusion indices have a poor track record at predicting growth figures, the considerable uptick in the services figure from 54.1 in January to a flash reading of 60.2 in February can’t be swept to one side. Additionally, sub-indices relating to new order growth in the services sector and employment growth in the private sector hammer home the message from the headline services data; sequential momentum in the UK economy likely picked up in February as the Omicron impacts faded.
Despite the strong indicators sent from the services sector, the manufacturing PMI data did show some areas of weakness.
Supply chain disruptions and staffing issues due to Omicron persisted in February and weighed on production growth. Despite this, backlogs of work decreased at the fastest rate since June 2020 as new order growth in the manufacturing sector stalled and rising inventories helped alleviate capacity pressures. Meanwhile, cost inflation continued to moderate within the manufacturing sector, signalling a decline in core goods inflation is likely in the coming 6-months.
The divergence in the two sectors means today’s PMI report provided something for both the more conservative and more hawkish side of the monetary policy argument and is therefore unlikely to move the pricing of a 50bps hike by the BoE in March.
Instead, markets may have to look towards this week’s calendar which is full of BoE commentary to determine what is the likeliest course of monetary policy action next month.
Market pricing of a 50bps hike by the BoE in March remains fairly stable at around 40% as today’s PMI data provides evidence for both sides of the argument
Simon Harvey, Head of FX Analysis