UK sees surprise uptick in PMI reports

• Better than expected PMI reports helps pound extend gains
• Germany is also showing green shoots.
• Trump’s interest rate talk has weighed on the dollar, but the bond market remains calm.
• The US replaces China for Europe’s luxury sector.

There was a rare positive economic surprise for the UK, the provisional January reading of PMI reports saw an increase in the manufacturing and service sector indices, and the composite index rose from 50.4 in December to 50.9, led by the service sector. The manufacturing survey remains in contraction territory, but it has improved to 48.2 from 47.0.

GBP gains as dollar weakens

The uptick has seen another pop higher in the pound. GBP/USD is back above $1.24, after sustained dollar weakness in the last 24 hours. Donald Trump’s call for lower US interest rates, combined with a Bank of Japan rate hike and better than expected PMI data from Europe and the UK, have all weighed on the greenback. GBP/USD has had a decent rebound this week after a terrible start to the year and is higher by more than 0.8% so far this week.

UK economy: there are green shoots, if you look closely enough

The detail of the UK PMI reports suggests that the UK private sector expanded marginally in January, due to the service sector. The survey also noted that the rate of contraction in manufacturing output has eased since December, which could be the early sign of a sustained pick up. There was a positive impact from new product launches and successful marketing campaigns, which also bodes well for the rest of Q1.

Budget still weighing heavily on the UK private sector

However, there is still large pockets of weakness in the UK economy. For example, the survey found that total new work fell at its fastest pace since October 2023, and respondents also noted cutbacks to non-essential spending. Staffing numbers continued to fall across the public sector, which extends the downward trend seen since the October Budget. Interestingly, the service sector noted a faster pace of job shedding vs. the manufacturing sector, which could weigh on the labour market figures later this year. A mixture of higher employer NI costs and a slump in business confidence was attributed to the fall in employment in this survey.

Inflation continues to rise, in blow to BOE  

Another worrying factor was the acceleration in the cost burdens across the private sector. The rate of inflation was at its highest level for 1.5 years, with accelerations seen in the manufacturing and the service sector. The worrying thing for the Bank of England is that firms are still passing on their price increases to customers. However, with new business falling sharply, there may be a limit to how much further they can increase prices.

AI could boost the UK private sector this year

On balance, companies expect business activity expectations to weaken in the coming months. For those who expect business to grow, they cited new product launches and the impact of technology spend adding a positive glow to their outlooks. However, those who expected business activity to contract in the next 6 months noted unfavorable UK economic prospects, and a slump in client investment plans since the budget.

Overall, there are some green shoots in this report. For example, tech investment in AI may be boosting business prospects later this year. If this increases in the coming months, then it could have a positive effect on the overall private sector down the line. Likewise, the rate of contraction in the manufacturing sector is slowing. However, there is a long way to go before the UK is out of the woods yet, and the chancellor may need to back track on more than the changes to the non-dom rules included in last year’s budget, to get the precious growth that she is looking for.

Europe PMI’s suggest pessimism could be overdone

European          PMI’s for January suggest that pessimism about the region could be overdone. The composite PMI for January rose back into expansionary territory for the first time since October. At 50.2, this does not suggest a massive rebound, but it could be the early signs of green shoots after a dark period for the Eurozone economy.

Is Germany narrowing the regional divide

The regional divide in Europe has been well noted, with southern Europe outperforming northern Europe, especially Germany. However, for the first time in 6 months, the pace of increase in the German composite PMI was faster than the increase in the overall Eurozone index. This is significant and suggests that Germany is playing catch up to the rest of Europe. While it is too early to tell if this will lead to a rebound in growth, it does suggest that Germany is crawling out of its malaise.

Burberry leads the FTSE 250 higher, as American rise

Burberry is the best performer on the FTSE 250 today after reporting better than expected results. This has sparked another leg higher for Europe’s luxury stocks, and LVMH, Richemont and Kering are leading the Cac higher on Friday. The French index is up more than 3% so far this week, as luxury stocks get a boost from a positive earnings season. Today was the turn for Burberry to deliver some good news. The luxury retailer reported a drop in retail sales of 4%, however this was better than the 13% expected by analysts. Like we saw with some of the French luxury houses, sales in America rose by 4% over the period, led by outerwear and scarves, and sales fell by 2% in Europe, however, this is a big improvement on the prior period, when sales fell by 18%.  Sales in China fell by 9%, but this was better than the 28% decline reported in the prior quarter. This report is adding to hopes that luxury demand has bottomed out, it also suggests that the new strategy from Burberry CEO Joshua Schulman is bearing fruit. LVMH will report earnings next week, and hopes are high for more of the same.

Burberry will report full year earnings in March, but after a weak first half of its fiscal year, this news suggests that the holiday season has been positive for Burberry. Its share price is up 12% so far on Friday and 23% YTD. There could be further for it to climb, as it is still lower by 6% in the last year.

Luxury is Europe’s tech

Overall, a theme is emerging in the European equity market: luxury is Europe’s version of tech. The luxury sector is the best performing sector so far this year, since consumer discretionary makes up 16% of the Eurostoxx 50 index. When the market’s view on luxury shifts, this can have a big impact on the overall European stock market. While luxury is not as big in the European index as tech is in the S&P500, this also reduces the concentration risk in Europe, which is also positive for the Eurostoxx index.