UK Services PMI weakest in five months

The Day So Far

Today is global Services PMI day, with a generally positive picture emerging, beginning with the Chinese services sector reaching its highest level for eleven months. Russia’s service sector growth hit a twenty month high, but the European equivalent numbers were rather more mixed; Spanish PMI was a solid beat, but the French and Italian PMIs disappointed. The UK PMI came in a five month low, which sets us up nicely for dollar strength, particularly if this afternoon’s raft of US data doesn’t disappoint. This follows strong dollar gains last night in the wake of hawkish comments from the Fed’s Lockhart, who said that the FOMC needed a very good reason not to act in the September meeting. These comments are somewhat surprising given that Lockhart is not exactly the most hawkish member on the committee, and probably raises the chances of a rate hike at next month’s meeting to 50%. The Euro below the 1.09 handle and T notes below 127000 handle support following the release of these comments.

Elsewhere, the Greek banking sector continued to take a battering, with many of the Greek financials now trading as penny shares. While a short-term rebound could be on the cards, particularly if a deal is reached with the Greek government for a new funding program, the longer-term outlook is dependent on the lingering ‘Grexit’ question. This has been put to one side following Tsipras’ capitulation to the creditors last month, but is bound crop up once again if no debt relief is forthcoming and economic malaise and high unemployment endure in Greece.

The Afternoon View

Some very important data releases on the agenda this afternoon, the ADP Employment change likely to set the expectations for this Friday’s Non-Farm Payrolls. There are just two employment reports before the next FOMC meeting in September, and as the previous month’s Fed statement revealed, the committee are looking ‘some’ improvement in the labour market before moving on rates. We will find out today and on Friday what investors’ expectations are for ‘some’, but we are looking for another strong report today and resulting dollar strength into Friday’s NFP release.

The other major event today in the DoE inventory report, with crude trying to find a bottom following a sharp selloff at the end of the last week taking WTI crude down to its lowest level since the end of March. We think crude is bobbling along the bottom, mindful of the fact that last night’s API release showed a drawdown of 2.4 million barrels has failed to bring much more of a bounce in crude so far and if this afternoon’s release is less than expected then we could see a final plunge below $45 and towards the March/ January lows before a more meaningful recovery can begin.