Services PMIs in Focus

The service PMIs have provided sufficient incentives to widen the currency ranges seen yesterday, though the net change is modest.  It was the strong UK service PMI that spurred the euro's losses more than that slight down tick in the euro area flash reading, as cross positions were adjusted.   Still the euro is holding above last week's lows seen just below $1.3370 on July 30. 

The UK services reading rose well above expectations to 59.1.  This is an eight month high. The consensus had expected a small improvement from the 57.7 reading in June.  Given the significance of the service sector, it more than offsets the modest disappointment seen in the manufacturing PMI (55.4 down from a revised 57.2).  

The robust report lifted UK interest rates 2-3 basis points (short and long end,) and lifted sterling back the highs seen before last weekend just below $1.69. The euro is also holding just above the lows against sterling it saw at the end of last week (~0.7925).  Some caution is evident.  Although the BOE meetings on Thursday, no one expects a hike, though the Shadow MPC has called for a 50 bp hike.  Some observers expect a dissent or two, but these will not be evident until the minutes are released on August 20.  There may also be some hesitancy ahead of televised debate later today on the the Scottish referendum. 

The euro area service PMI was...meh, slipping from the 54.4 flash reading, a two-year high to 54.2.  The German reading edged up to 56.7 from 56.6 flash, while France was unchanged at 50.4; the flash having picked up the improved from the lowly 48.2 reading in June.  

Italy and Spain moved in opposite directions.  Italy is struggling, and this will be clear in tomorrow's Q2 GDP report, where a 0.1% rise will simply offset the 0.1% contraction in Q1.  The risk is on the downside.  The service PMI slipped to 52.8 from 53.9 in June.  Economists had expected a small increase.  Spain improved to 56.2 from 54.8.  New business, a leading indicator, was especially strong rising to 58.0 from 54.4.  

We had expected the euro to consolidate ahead of the ECB meeting on Thursday.   Thus, far it has remained within last Friday's ranges.  For this to continue the euro needs to recover from the decline in the European morning, which looks likely based on the intra-day charts.  However, even though the speculative market has amassed a large short euro position ( see futures positioning), the market is still inclined to sell more.  New offers are seen in the $1.3425-35 area. 

The Reserve Bank of Australia is the first of four major central banks that meet this week.  The was no change in policy or the accompanying statement.  It is the 12th month it has been on hold.  Separately, Australia reported a smaller than expected June trade deficit (A$1.68 bln vs A$2.0 bln expected), though the May deficit was offset about half of this.  

Nevertheless exports rose 0.5% after May's 4.7% decline.  This was despite the drop in iron ore prices, which appeared to have been largely offset by increased volume of coal.  The foreign demand reflected by the increase in exports compliments the increased in domestic demand seen in the strength of the retail sales (0.6%, or twice what the economist expected).  Employment data is next on tap for early Thursday in Sydney.  

China's official measure of its service sector slipped in July to a six-month low, and that was reported over the weekend. The HSBC measure fell much more seriously and at 50.0, it is the lowest since the time series began in late 2005.  It is down from a 15-month high of 53.1 in June.   The volatility of the HSBC measure should be discounted.  Nearly all the other economic indicators suggest that the China's economy has stabilized.  There continues to be important weakness is the real estate market, while the weaker luxury goods/service sales appears to be a function of the anti-corruption campaign.  Trade figures are due out later this week, and a further increase in exports is expected. 

The Bank of Japan meets at the end of the week.  Recent data warns of the risk that it downgrades its assessment of industrial production.  However, the service sector PMI provides a glimmer of hope.  The 50.4 reading is the first above the 50 boom/bust level since March.   Japan reports Q2 GDP in the middle of next week.  The consensus calls for around a 7% decline at an annualized pace. 

The North American session features the US service ISM, which is expected to rise to 56.5 from 56.0, and factory orders, which likely bounced back after falling 0.5% in May.   Although the factory orders report is form Q2, which is old now that Q2 GDP is in hand, the inventory component may be important for revision to the GDP estimate.  That GDP estimate seemed to assume a large rise, and if it does not materialize, it may point to a downward revision.  

Lastly, in terms of geopolitics, there is another attempted truce in Gaza and tensions continue to run high in Ukraine.  Some reports warn that Russia is getting ready to step up its support for the separatists, who appear to be losing to the Ukrainian government.  Russian equities and bonds are lower today, though the ruble is firmer. 

Investors should note another front in European/US confrontation with Russia may erupt.  Hostilities between Armenia, supported by Russia, and Azerbaijan, supported by the US/Europe and Turkey have increased in recent days and is now reportedly the deadliest since the 1994 cease fire.   There are talks scheduled for later this week, but the situation does not appear promising.