The UK manufacturing PMI index was unchanged at 57.3 for February while the services-sector index strengthened sharply to an 8-month high of 60.8 for the month from 54.1 in January and above expectations of 55.7. New orders increased strongly on the month and employment increased at a faster rate. Input cost inflation remained high with the second fastest rate of increase in the services sector. There was a further strong increase in charges with the second-highest increase on record. The data underpinned expectations that the economy was rebounding quickly from the Omicron variant and that inflation pressures remained strong which also maintained expectations that the Bank of England would raise interest rates further. Sterling was unable to gain further support with further rate hikes already priced in and risk appetite was also more vulnerable during the day. As equities lost ground and the dollar gained an element of defensive support, Sterling lost ground against the dollar.
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According to flash data, the German PMI manufacturing index declined to 58.5 for February from 59.8 previously and slightly below consensus forecasts, but the services-sector index rebounded to 56.6 from 52.2 and well above market expectations. The Euro-zone manufacturing index also edged lower for February, although output growth hit a 5-month high. There was a strong rebound for the services-sector index to a 3-month high of 55.8 from 51.1 and well above expectations of 52.2 as the Omicron impact proved short lived. Although there was a slight easing of input cost inflation for manufacturing, overall costs increased at the second highest rate on record and average prices charges for goods and services increased at the fastest pace on record. The pricing data will maintain underlying concerns over inflation trends within the economy. In its latest monthly report, the German Bundesbank stated that the economy is likely to contract again in the first quarter of 2022 with a significant impact from pandemic-related absences from work. Industrial trends remained positive, however, and the central bank expects rebound in the spring. The Euro lost ground during the day with unease over the Ukraine situation sapping support amid expectations that Russian President Putin would recognise separatist Ukraine regions of Luhansk and Donetsk.
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US Treasuries were little changed on Monday, but US equity futures lost ground amid the US holiday. There were further concerns surrounding the Ukraine situation. After the European close, President Putin confirmed that separatist regions in Eastern Ukraine would be recognised and risk appetite remained on the defensive and the dollar dipped, although the impact was limited by Wall Street closure. There were fears that the move would lead to Russian forces entering the two regions and potentially trigger a further escalation in the conflict. During the Asian session on Tuesday, there were reports that Russian forces had entered the region in what was described by Russia as a peace-keeping operation. The US will announce further sanctions on Russia on Tuesday and overall risk appetite remained very fragile, although regional bourses did recover from intra-day lows.
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