Disinflation to continue strong services PMIs

• Services sectors key for developed market economies

• Lower prices and higher wages should drive retailers onward

• Ukrainian central bank panics and raises rates to 30%

• I expect the Bank of Canada to hold rates this afternoon

Good morning,

Of all the PMI days, the third is largely the most important as services sectors give us the latest run-down of their performance. Service sectors – areas such as retail, hospitality, finance and professional services - typically make up anywhere between 60 and 90% of developed economies. Much like the UK economy has demonstrated since the 1980s, a strong services sector is almost a guarantee of strong economic performance. Obvious arguments can be made around the need for a rebalancing of the economy away from services; the UK’s lack of a strong manufacturing base exacerbated the recession of 2008-2009 as we well know. Britain remains a nation of shopkeepers. We will find out how well these shops, and everything else, are performing at 09.30 today.

Last month’s number showed the 25th month of growth for the UK service sector and came alongside strong indications that future strength is also being predicted. Jobs were shown to have increased to clear backlogs but also to take on new orders in the longer term. If the reported upturn in wages is continued - as we have already started to see in structured wage data - then the UK economy is set for some very strong performances.

Today we will be looking to see whether businesses are still seeing and expecting input prices to fall, as this would suggest that further pressure on consumer price inflation is around the corner and that the retail landscape is looking increasingly rosy for the UK consumer. Monday’s manufacturing announcement hinted at disinflation in supply chains so I would be surprised if the services sector did not report similar.

I will also be looking out for any thoughts on the election. Yesterday’s very strong construction PMI number showed growth in jobs, wages, output and orders but included anecdotal evidence that some investors were waiting until after the election to pledge money to projects.

As is typical on PMI day we receive the European numbers through the morning with Italy's number due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30. A slight recovery has been seen in Eurozone manufacturing and yesterday’s monster German retail sales number – rising by 2.95 on the month – auspices well for strong European numbers as well.

Elsewhere, the movements of central banks continue to dominate. Yesterday it was announced that the Ukrainian central bank will raise rates to 30% today in a bid to prevent a further collapse of the hyrvnia. Rates are currently at 19.5% and this move to 30% will represent the fifth emergency policy decision in ten days. While the currency may find some support, the Ukrainian economy will surely not as corporates are hit by foreign currency debt obligations and consumers hold off spending. I am also unsure as to how the central bank came up with 30%. Lucky dip? Dart board? Answers on a postcard please.

Today’s Bank of Canada decision is also an interesting one for us central bank watchers. Having cut rates in January to 0.75%, Governor Stephen Poloz suggested that they would wait to see how the country responds before cutting again. Swaps markets are pricing in one more cut by the middle of the year and we are looking for additional CAD weakness as the true scale of the movements in oil markets are seen. The Australian central bank held off on additional rate cuts yesterday morning and we suspect that the Bank of Canada will do the same. The market puts the probability of an additional rate cut at 26.3%.

Have a great day.