Sunday 18 February 2018

Daily Market Update: Services and Composite PMI's set to dominate

Construction
Construction

Hugh McGovern

Construction PMIs released by Markit & CIPS yesterday showed the lowest reading since June 2009, coming in at 45.9 for the month of July.

Albeit a reading that was better than what analysts had forecast of 43.8, the report showed further evidence of the slowdown of the UK economy since the Brexit vote in June. One aspect of the release that one can draw positives from was the fact that new orders in the industry fell at a slower pace in July than in June, suggesting the initial shock from the Brexit vote had plateaued somewhat for the construction industry, but in reality UK economic data won’t display the full effects of Brexit until mid-August when we see July’s retail sales data.

Personal Income and consumer spending data released in the US yesterday came in relatively in line with expectations. US personal income growth in June was +0.2% m/m vs. expected +0.3% while personal spending growth in June was +0.4% m/m vs. expected +0.3%. The headline PCE deflator was unchanged at +0.9% y/y and core PCE deflator was unchanged at 1.6% y/y. Also of note here were a number of revisions lower made to wages and salaries in Q1 which were published on Friday last week. The revisions were significantly lower, having previously thought that wages and salaries had increased by 4.6% annualised in Q1, it is now reported that they have declined by 0.5% annualised for this period, suggesting that employment and/or earnings may not have been as robust in early 2016 as had been previously believed. These developments will strengthen the hand of the more dovish members of the FOMC who favour a wait and see approach to further tightening. EURUSD reached fresh 5 week highs overnight, reaching 1.1231 in the American trading session. Yesterday we also heard Dallas Fed President Kaplan speak at an event in Beijing. He said he is “closely monitoring how slowing growth, high levels of overcapacity and high levels of debt to GDP in major economies outside the U.S. might be impacting economic conditions in the U.S”. He also said the Fed needs to be “patient and cautious in removing accommodation in light of global risks” and that his breakeven result for Non-farm Payrolls is between 80-100k per month to be consistent for reducing labour market slack. Friday’s Non-farm payrolls are the pick of the week for US data releases, a Reuters Poll of 100 economists’ forecasts +180k to be added this week.

Looking to today, we have a number of European services and composite PMIs that are out early this morning - fresh July PMIs in Italy and Spain, revisions to France, Germany and the Euro-area. Euro-area Retail Sales are out at 10.00am, where a YoY figure of 1.80% is expected versus last month’s figure of 1.60%. In the UK we get the final July services and composite PMIs at 9.30am – the initial manufacturing estimate was revised down nearly 1 point earlier this week so we will watch closely for any revisions here. In the US, we have ADP Employment data out at 13.15pm which will provide some colour to how the labour market is looking ahead of the eagerly awaited Non-farm payrolls. At 3.30pm we get the ISM non-manufacturing PMIs which, after reaching a seven-month high in June, is expected to have inched down by about half a point in July to 56.0.

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