UK PMI Signals Recession but Cable Holds Bid on Brexit Hopes

Market Drivers October 3, 2019
UK PMI sinks
All eyes on US ISM
Nikkei -2.01% Dax closed
UST 10Y 1.58%
Oil $52/bbl
Gold $1500/oz
BTCUSD $8300

Europe and Asia:
GBP UK PMI Svc.49.5

North America 
USD ISM Non Manufacturing 10:00

UK PMI services report dipped below the 50 boom/bust line suggesting that the economy is headed for the recession, but cable ignored the news holding bid at 1.2300 as markets focused on possible progress on Brexit talks.

UK PMI services printed at 49.5 vs. 50.3 eyed as the costs of Brexit uncertainty clearly weighed on UK businesses. September saw the steepest drop in employment since Dec 2009. Job losses were seen in all 3 sectors, with services reporting largest drop in headcounts for 9 years, while manufacturing and construction jobs were shed at rates not seen since Feb 2013 and Dec 2010 respectively.

Output contracted across all three main sectors of the economy for the first time since August 2016, as services joined both manufacturing and construction in reporting falling business activity.

All of this suggests that the UK economy will likely contract in Q3 of this year and that the next move from BOE may have to be a rate cut.

Typically, markets would have taken sterling lower on such dour news, but markets are much more focused on the Brexit negotiations and on that front there appeared to be a scintilla of progress as Irish officials did not completely reject PM Johnson’s new proposals for customs arrangements on the Northern Ireland border.

Still, the two sides remain far apart and it is unclear if any sort of a deal may be struck before the October 31 deadline, but the default view in FX is that there will be no hard Brexit for the UK which is keeping cable bid at the 1.2300 level for the time being.
On this side of the pond, the focus will turn to the US ISM Non-Manufacturing report which is due at 14:00 GMT. Markets are looking for a print of 55.1 versus 56.4 the month prior, but worries persist that the number could come in much weaker than that confirming fears that the global economic slowdown has expanded to the US which has been relatively immune to drop off in demand.

USDJPY has already tested the 107.00 level in early Asia session trade and should the number print much weaker than expected than 106.50 could be tested on assumption that Fed may have to cut rates at every meeting til the end of the year.