UK manufacturing continued to ignore possible Brexit risks at the start of 2017. January's sector PMI weighed in at 55.9, down just a couple of ticks from December's unrevised two and a half year high and in line with market expectations. This was the sixth straight reading above the 50 expansion threshold.
Output growth was the strongest in thirty-two months and, crucially, was underpinned by another solid increase in new orders, largely reflecting the buoyancy of the domestic market. Disappointingly, export demand slowed markedly. Employment similarly posted a smaller advance than in December but the new index of business optimism about the year ahead climbed to an 8-month peak.
Meanwhile, inflationary pressures built significantly with average input costs rising at their fastest rate in the survey's history. Sterling weakness and higher commodity charges were once again the chief culprits. As a result, factory gate prices also notched a near-record gain.
In general, today's report suggests that UK manufacturing is performing well and should make a useful contribution to first quarter real GDP growth. However, cost pressures are an increasing risk factor and will further erode the sector's profit margins and/or provide an additional boost to already accelerating CPI inflation. The BoE MPC will be watching future developments very closely.
The Manufacturing Purchasing Managers' Index (PMI) provides an estimate of manufacturing business activity for the preceding month by using information obtained from a representative sector survey incorporating around 3,000 companies. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The survey covers more than 600 industrial companies and is compiled by the Chartered Institute of Purchasing and Supply (CIPS) and Markit.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index in the U.S. and the Markit PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.