The UK’s dominant services sector continues to gather momentum in October as it grew at the fastest rate since January but analysts warn that inflation pressures are beginning to build up in the economy. The Markit/CIPS purchasing managers’ index (PMI) for services showed a reading of 54.5, up from 52.6 in September, which suggests the dominant services sector (that makes up 80% of the economy) is strengthening despite Brexit fears. This was the highest reading since January and beat all forecasts for the month. Any reading above 50 marks expansion. Survey respondents cited a growing level of new business orders in October with new contracts rising at the fastest rate in nine months. Companies linked the new work to rising international demand linked to the weaker pound, improving market confidence and promotional campaigns. It is the third straight month that the survey has shown expansion in the services sector, which ranges from banking and finance to the restaurant and hotel trade, after a sharp decline in July after the Brexit vote.
The stronger PMI reading for UK services followed similarly robust readings for manufacturing and construction PMIs in October. The UK’s manufacturing PMI for October was 54.3 which was slightly below economist expectations of 54.5 albeit a slowdown from the September figure of 55.4. Analysts believe that the sector remains on a firm footing and should return to growth in the fourth quarter.
The UK construction PMI rose to 52.6 in October from 52.3 in September, beating market forecasts of 51.8. The reading pointed to the strongest expansion in the construction activity since March led by another solid increase in residential work. There was also a stabilisation in commercial construction activity while civil engineering decreased slightly.
This month appears to have has marked a turning point in the attitude of Monetary Policy Committee (MPC) members as the doves have turned hawkish as expectations of an interest rate cut have given way to fears of an interest rate rise to counteract the potential inflationary impact of the fall in the value of sterling. Three months ago, markets were anticipating a rate cut this month.
Across the next three years the overall projection for UK growth in the latest Quarterly Inflation Outlook Report is largely unchanged. Growth domestic product (GDP) was forecast in August to be 2.5% smaller over the three years than was expected back in May. The forecast has been revised down to 2.7% which is slightly worse but not by too much. Growth is expected to be stronger in the short term but weaker long term.
Analysts believe that the stronger than expected U.S. wage growth and solid levels of job creation have bolstered the chances of an interest rate hike in the world’s biggest economy in December. Wage growth in September was revised up to 0.3% from 0.2% while non-farm payrolls grew by 161,000 in October. Although the latter was below market expectations, the September figure was revised up to 191,000 from 156,000 and the August figure revised up to 176,000 from 167,000 while unemployment dipped slightly to 4.9% from 5.0%.
It would appear from comments made by members of the U.S. Federal Reserve’s policymaking body that the case for an interest rate rise in December has continued to strengthen since the meeting in September but members have decided to wait for some further evidence of continued progress before taking action. Economists believe that the encouraging employment situation has provided some of the evidence required.
Business activity in the Eurozone rose at a slightly slower pace than predicted by the first estimate last month. This has raised questions about whether the Eurozone economy is breaking out of its sluggish growth phase. Policymakers at the European Central Bank (ECB) will be disappointed to see that the Eurozone purchasing managers’ index (PMI) rose to 53.3 in October which was down from an initial “flash” estimate of 53.7. However the reading was still up from 52.6 in September and rose at the quickest pace since January. Analysts predict that the weaker than previously indicated expansion suggests that the fourth quarter of the year could see the Eurozone economy expanding at the same disappointing pace of 0.3% as in the third quarter.
Shares in Credit Suisse continued their fall as the group only managed to generate a profit for the third quarter on the back of one-off gains and warned of tough times ahead. The shares initially closed down 7.0% after it reported a profit of only CHF 41.0 million but recovered to 3.4% down for the week. This was better than expected but not enough to convince investors that its turnaround was gathering pace. One of the main contributors for the poor performance was its UK operations that reported a fall of 38% in equities trading revenue much of which was down to a drop in its European business. Third-quarter profit represented a drop of 95% year-on-year and net revenues of CHF 5.4 billion were down 10% year-on -year.
Wells Fargo has admitted that it is under investigation by federal officials as it set aside a further U.S.$ 700 million to settle legal claims over mis-sold accounts and sub-prime mortgages. The Securities and Exchange Commission and Department of Justice are among several federal, state and local government and justice agencies that are examining its sales practices. Wells Fargo is accused of defrauding its customers by setting up two million unauthorised bank and credit accounts to generate fees. The scandal claimed the scalp of its longstanding chief executive last month.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||7th November 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||20.02||20.99||-4.6%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.78||1.71||+3.8%|
|Allied Irish Banks||63||61||+3.3%||5.20||5.29||-1.7%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.36||14.35||+0.1%|
|Aust and NZ Banking Group Ltd||71||68||+4.4%||26.94||27.62||-2.5%|
|Banco Bilbao Vizcaya Argentaria S.A.||125||117||+6.8%||6.20||6.59||-5.9%|
|Parent: Barclays plc|
|Barclays Bank plc||93||99||-6.1%||1.81||1.91||-5.2%|
|BNP Paribas S.A.||74||73||+1.4%||50.64||53.97||-6.2%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.74||13.32||-4.4%|
|Credit Agricole S.A.||67||67||0.0%||9.52||9.94||-4.2%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||141||132||+6.8%||20.33||21.05||-3.4%|
|Deutsche Bank AG||229||216||+6.0%||12.23||13.33||-8.3%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||64||71||-9.9%||5.95||6.25||-4.8%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||63||66||-4.5%||11.95||13.13||-9.0%|
|Intesa Sanpaolo S.p.A.||151||133||+13.5%||2.01||2.16||-6.9%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.86||4.98||-2.4%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||75||81||-7.4%||0.56||0.58||-4.3%|
|Metro Bank plc||n/a||n/a||n/a||26.99||27.96||-3.5%|
|Nationwide Building Society||85||85||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||73||72||+1.4%||92||95||-3.2%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||121||127||-4.7%||1.85||1.94||-4.6%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||82||82||0.0%||4.30||4.52||-4.9%|
|Shawbrook Group plc||n/a||n/a||n/a||2.34||2.25||+4.0%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||105||108||-2.8%||6.33||7.03||-10.0%|
|Svenska Handelsbanken AB||61||63||-3.2%||119||126||-5.6%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3684||3877||-5.0%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||99||96||+3.7%||n/a||n/a||n/a|