In what is a busy day of fundamental new us today’s UK macro release is painted a mixed picture, with a poor manufacturing PMI overshadowing slightly better-than-expected reading from third-quarter GDP. The news and general risk aversion in the markets today left the pound weaker against dollar and Japanese yen, but it rallied vs the Swiss Franc, Australian and New Zealand Dollars.

UK Manufacturing PMI Stumbles in October

The manufacturing PMI fell to 47.4 in October from 50.8 in September. the sharp mishear certainly bolsters the case made by the Bank of England that needed to expand its bond purchase program in order to help stimulate an economy that was in danger of contracting in the fourth quarter.

The consensus forecast had manufacturing activity flat at the 50 level separating expansion from contraction. the figure therefore sharply undercut expectations and shows that manufacturing contracted for the third month out of the last four. The 47.4 reading on its own is the weakest since June 2009.

From Markit: “The trend in new order inflows deteriorated markedly during October. The level of new work received contracted at the sharpest pace since March 2009, reflecting low client confidence, market uncertainty and destocking. New orders declined in almost all of the sub-sectors covered by the survey, the exception being Food & Drink.

Companies reported weaker demand from both domestic and export markets. The level of incoming new export orders fell for the third month running, but at a slightly slower pace than in September. Reduced order inflows were received from clients in mainland Europe, Asia and the US. The latest reduction was partly linked to clients delaying purchases or destocking in response to the deteriorating global economic backdrop.”

Services Index Declines

In a second disappointing fundamental release the UK index of services rose 0.4% 3m/3m in August which was markedly lower than the 1.4% forecast for that period. Also we had the figure for July revised downward to show increase of 0.8%from originally reported 0.9%. While dated, the index shows us that UK services grew at a slower rate in the middle of the third quarter.

On the Bright Side, GDP Beats Forecasts Slightly

It wasn’t all bad news for the UK macro picture as third-quarter GDP grew 0.5% compared to the second quarter, which beat expectations of a 0.4% increase. In the second quarter GDP was up a paltry 0.1%.

From Bloomberg: “The U.K. economy grew faster than economists forecast in the third quarter as it rebounded from one-off factors before an escalation of Europe’s debt crisis that threatens to push Britain back into recession.

“Activity is fading quickly,” David Tinsley, an economist at BNP Paribas SA in London. “You only to have to look at today’s manufacturing number to see that. We see the possibility of a contraction in the fourth quarter.”

In the third quarter, U.K. services output grew 0.7 percent, while industrial production increased 0.5 percent, the statistics office said. Services was led by finance and business services, which jumped 0.8 percent, the most since the third quarter of 2007, just before the start of the financial crisis. Within production industries, manufacturing increased 0.2 percent. Construction fell 0.6 percent.”

The concern is that the escalation of the sovereign debt crisis in the third quarter will have knock-on effects on the UK economy with weaker demand from abroad combining with constrained domestic demand because of higher unemployment, high inflation and austerity measures.

GBP as a Safe Haven? Gilts Certainly in Demand

despite the softer manufacturing data the pound managed to gain against its higher yielding rivals such as the Australian and New Zealand dollars. This shows us that during times of risk aversion the commodity bloc currencies are sold more sharply than the pound. In fact UK gilts – government bonds – had been in pretty strong demand because of austerity drive undertaken by the UK government which has restored confidence in UK bonds from bond vigilantes.

Here’s a look at the UK 10-Year over the last 6 months, as yields fall amid stronger demand for UK gilts.

Here’s a look at today’s action, in which the 10-year yield fell from an open near 2.32% to 2.24%, a close to 8% change!

The GBP should benefit from this demand for UK bonds during times of risk aversion, and the GBP demonstrated that “safe haven” appeal in today’s session as it rallied strongly against the AUD and NZD.