Interest high, confidence low

Sterling

The pound has been quietly gaining value over the past four months. The accompanying chart depicts sterling’s value on the Bank of England’s Effective Exchange Rate Index (EERI). This evaluates the pound against a basket of currencies, weighted to reflect the volume of UK trade with other countries.

The index was based at 100 in January 2005. Its recent low came last September during the Truss premiership, when the monthly average EERI fell to just 76.3. But it has climbed steadily over the past four months, averaging 80.1 in May. That is marginally better than last year’s annual average of 79.7 and so far is confounding most economists’ forecasts of an average of around 78 for 2023.

The four largest currencies in the EERI basket are the euro, the dollar, the Chinese yuan and the Japanese yen. Sterling has made gains against all four since January, albeit minor against the euro (1.1%) and the dollar (2.0%), but significant against the yuan (4.7%) and the yen (7.5%).

Last month’s hike in the interest rate from 4.25% to 4.5% helped to keep the pound relatively attractive to currency traders. That appeal may well grow because the rate is widely expected to exceed 5.0% before the end of the year, as the Bank of England strives to counter unexpectedly stubborn inflation. The next rate announcement is expected on 22 June.

Meanwhile, the Federal Reserve interest rate in the US is already a little over 5.0%. That rate is thought unlikely to go any higher: the strength of the pound against the dollar could improve further if the UK rate surpasses it.

Manufacturing confidence

Confidence among UK manufacturers remains weak. The latest S&P Global/CIPS UK manufacturing purchasing managers’ index (PMI) dropped from 47.8 in April to 47.1 last month. This widely regarded survey tracks monthly changes in the confidence of around 650 manufacturers about their business.

It uses a weighted index that evaluates key factors such as new orders, output, employment and suppliers’ delivery times. PMI scores above 50 denote an improvement on the previous month, while scores below 50 indicate deterioration. May’s score of 47.1 was the tenth successive month below the neutral 50 level.

“The manufacturing downturn deepened in May as the rates of contraction in output, new orders and employment all accelerated,” reports the survey.

The drop in new export business for UK manufacturers makes particularly grim reading. “Another fall in export orders for the sixteenth month demonstrated that customers from overseas became tired of additional Brexit checks,” said John Glen, chief economist at the Chartered Institute of Procurement and Supply (CIPS), adding, “the fall in overseas interest is the fastest since January”.

But the survey did unearth some positive news. After over three years of monthly rises, a “mild fall” in manufacturers’ average input costs was noted. And supply chain pressures have eased too, with reports of better material availability and fewer logistical issues.

Haulage rates

Haulage rates have slipped back in the last two quarters since they peaked at an all-time high in Q3 last year. The latest data from the Services Producer Price Index (SPPI) published by the Office for National Statistics show rates in the first quarter of this year typically were 1.0% lower than the last quarter of 2022. Rates had already edged down by Q4 and the latest data indicate Q1’s rates were 1.7% below Q3’s peak.

This is almost certainly the effect of fuel surcharges being dialled back as the cost of diesel softened in the first quarter of this year. Further declines in the bulk diesel price during April and May suggest another small reduction in haulage rates may be detected in the SPPI’s Q2 data.

Fuel and oil

The monthly average price of Brent crude oil dropped from $85/ barrel in April to $75 last month, the lowest for 17 months. Many operators would have seen bulk diesel prices in the region of 105ppl to 110ppl in May, their best since autumn 2021. Although global oil production is still being kept in

Value Of Sterling

Haulage Rates

Brent Crude Oil Price

check, demand is also subdued because so many economies remain nervous about persistent inflation.

With balanced supply and demand, most analysts expect the oil price to remain relatively stable for the remainder of 2023. The majority of recent forecasts suggest Brent will average between $78 and $82/barrel during the next six months. That points towards bulk diesel prices in the region of 110ppl to 122ppl, all other things being equal –which they rarely are. n