China services disappoints ahead of European PMI run

• Chinese services sector slows to lowest since 2005

• Australian central bank maintains rates at 2.5% for 12th month

• European services data to be affected by MH17 sentiment

• US ISM to move higher as incomes roll higher through 2nd half

If a recent good batch of data had suggested that China’s economy was back on track courtesy of the government’s recent stimulus measures, then last night’s service sector PMI will have firmly squashed them. China’s overall services PMI reading fell to 50.0 – flat on the month – against last month’s expansion of 53.1. This is the lowest reading since 2005 and suggests that any benefit from the government’s increased spending is only being felt in the country’s manufacturing sector, whose PMI rose on Friday to a 2yr high. Some have attributed the slip to the continuing declines we have seen in sentiment surrounding the Chinese housing market. It seems, at least at the moment, that the rebalancing of the Chinese economy towards consumer spending from manufacturing will remain in the background while the recovery is ongoing.

Asian markets are trading sideways as we open up this morning with European markets slightly higher following a good showing on Wall St last night.

Services data from the European economy and its constituent parts is due throughout the morning session and it would be safe to say that only a dramatically positive set of readings would alter investors’ mind sets on the single currency. The preliminary measures released around 10 days ago were surprisingly strong but, as with Friday’s manufacturing releases, we expect these final numbers to have been more adversely affected by a slip in sentiment following the increase in tensions in Ukraine following the downing of Flight MH17 by Russian rebels.

We have seen in recent days that the impact of Russian sanctions is having some blowback on German and wider European assets at a corporate level. It naturally follows that we should see wider macro-economic data affected in a similar way. Italy's reading is due at 08.45, France’s at 08.50, Germany’s at 08.55, with the Eurozone wide measure at 09.00 - all times BST.

The UK measure at 09.30 comes at an important time for sterling and the UK economy. As we highlighted in yesterday’s sterling update, there is the possibility that the UK economy has hit a high water mark for 2014. The expansion that the UK economy has been through in the past 18 months or so has been very impressive but will become tougher to maintain as the obvious slack in output and labour that the credit crunch and recession caused was taken up. Certainly, the 55.4 reading on Friday’s manufacturing PMI is consistent with growth lower than Q2’s 0.8%. Consensus for today’s services reading is 58.0, slightly higher than last month’s 57.7.

US non-manufacturing ISM will likely be the highlight of the week for the US dollar and should continue the gradual grind higher that the greenback has been able to sustain for the past week. Following Friday’s jobs number it may be easy to get downbeat about earnings given their flat reading. We however believe that the magnitude of the recent increases allows for positivity. This means that despite the disappointment of a flat earnings number on a monthly basis that a continual increase in the number of employed people will improve consumer spending and income dynamics through the 2nd half of the year. More people earning, more people spending. More people working, more output overall.

Overnight the Reserve Bank of Australia held rates at 2.5% for the 12th month in a row and maintained a very down-the-line statement on monetary policy. As with all central banks that have adopted an essence of forward guidance into their monetary policy, the accompanying statement preached the benefits of waiting on data and that will decide the CB’s decisions. AUD is a little higher this morning as near-term rate cut expectations have been priced out.

Have a great day.