UK Private Sector PMIs and Wage Growth a Test for the BoE

It was a relatively busy start to the day on the UK economic calendar. Prelim UK private sector PMIs were in focus this morning.

After the disappointing labor market report and GDP numbers, the PMIs needed to beat forecasts to force the Bank of England into a more hawkish policy stance.

UK Private Sector PMI Highlights Service Sector Inflation Woes

The Manufacturing PMI fell from 47.8 to a five-month low of 46.9, with the services PMI down from 55.9 to a two-month low of 55.1 in May. Economists forecast PMIs of 48.0 and 55.5, respectively.

According to the prelim survey,

• The UK Composite PMI declined from 54.9 to 53.9 in May, with the manufacturing sector posting a decline in output for the third consecutive month.
• Manufacturers cited subdued order books and customer destocking as contributor factors.
• Budget pressures among service sector clients, increasing economic uncertainty, and higher borrowing costs impacted service sector growth.
• New work increased at the weakest pace since February, with the manufacturing sector a drag.
• Weak global demand weighed on manufacturing exports, with new orders from overseas declining at the most marked pace in four months.
• Employment across the private sector increased for the second successive month. However, the rate of job creation was weaker than the 2022 average.
• Input price inflation softened, with manufacturing firms reporting the fastest decline in input costs for over seven years.
• While falling prices for raw materials and lower energy bills contributed to easing input costs for manufacturers, wage growth within the services sector led to the most marked rise in cost burdens since February.
• Output price inflation accelerated further in May, though the inflation rate was the second lowest since August 2021.
• Optimism across the private sector waned and was the lowest since February. Firms cited concerns over the economic outlook, higher interest rates, and weakness in the residential property sector as contributory factors.

GBP to USD Reaction to UK Private Sector PMIs

Ahead of the PMI numbers, the GBP/USD rose to a pre-stat high of $1.24468 before falling to a low of $1.23902.

However, the GBP/USD responded to the PMIs, rising to a high of $1.24202 before falling to a low of $1.23854.

Solid service sector activity, wage growth, and inflationary pressures across the services sector will draw the attention of the Bank of England. The services sector accounts for over 75% of UK economic output and more than 80% of UK employment.

More aggressive Bank of England monetary policy move could send the UK economy into a deep recession.

With pressure on the Bank of England to tame inflation, the PMI numbers and components could become an area of focus at the Treasury Select Hearing on the May Monetary Policy Report later today (10.15 am BST).

This morning, the GBP/USD was down 0.31% to $1.23985.

Up Next

With the UK private sector in focus, investors should also monitor BoE commentary. BoE Governor Andrew Bailey, Chief Economist Huw Pill, and Monetary Policy Committee members Catherin Mann and Silvano Tenreyro will attend the Treasury Select Hearing on the May Monetary Policy Report. MPC member Jonathan Haskel is also on the calendar to speak today.

Looking ahead to the US session, it is a busy day on the US economic calendar. Prelim US private sector PMI numbers for May will influence market risk sentiment. While the headline figures will draw interest, investors should consider the sub-components. We expect the employment, pricing, and new order components to have the most impact.

However, Fed commentary and debt ceiling-related news will influence. Overnight, US President Joe Biden and Speaker of the House Kevin McCarthy failed to reach an agreement.