Sunday 19 November 2017

Daily Market Update: US services ISM in focus ahead of payrolls tomorrow

Supreme Court building at Capitol Hill in Washington D.C. REUTERS/Carlos Barria
Supreme Court building at Capitol Hill in Washington D.C. REUTERS/Carlos Barria

Rachel Barden

The non-manufacturing ISM index headlines the data releases today.

The improvement in the ISM manufacturing index and durable goods orders report sets manufacturing on relatively more solid footing to start the year. But the US services sector, which is less exposed to the weakness abroad and the stronger USD than the manufacturing sector, is still tasked with propelling US growth momentum. The index slipped to 53.5 in January, a third consecutive monthly decline. While still well in expansion territory, 53 is the market expectation here, a fourth decline may add new uncertainty to the outlook for the services sector and put pressure on the USD, given the importance of the services sector as a driver of employment. Markets will watch this closely for insight into Friday’s non farm payrolls report.

The Federal Reserve’s Beige book report yesterday showed that the U.S. economy continued to expand across most of the country, while wage growth was described as varying widely across regions and within sectors, ranging “from flat to strong”, potentially clouding the employment outlook and posing difficulties for policymakers when they next meet on 15th March to decide the path of rates. San Francisco Fed President John Williams (non-voter) said that interest-rate forecasts the FOMC is set to publish after its March meeting could differ “slightly” from those issued at the end of last year, but that economic outlook hasn't changed substantially since December. A solid ISM report today could further support expectations that the Fed remains on track to raise interest rates this year.

ECB Executive Board member Benoit Coeure said yesterday evening that Euro zone countries need to pool their fiscal resources and decision making if the euro area is to dispel doubts about its ability to withstand economic shocks. He added that the current euro zone set-up, characterized by fragile public finances in many countries and modest economic growth, "casts doubt on the euro area’s capacity to face future economic shocks. Euro zone PPI was in line with expectations in January, falling 2.9% y/y vs. -3.0% in December. He also said euro zone banks can deal with rock-bottom interest rates and actually benefit from the central banks efforts to prop up growth and inflation.

Yesterday evening Socialist leader Sanchez could not get the Spanish Parliament to support his bid to become PM: he needed 176 votes in favour and only secured 130. Yesterday’s vote was little more than a formality. Its significance comes from the fact that it will set the clock ticking: if no one can be elected PM within two months new elections will be held on 26 June (three days after the UK’s EU referendum).

UK construction PMI was weaker than expected, falling to 54.2 in February from 55.0 previously and vs. 55.5 expected. Despite this, we saw GBP continue to strengthen against the EUR and USD. BOE Deputy Governor Jon Cunliffe said virtually all recent growth in UK mortgages has been due to buy-to-let and the risk is that these owners will head for the exits if house prices start to decline.

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