US services PMIs seen pulling back slightly in October

Good morning,

• Constancio comments undo positive moves following stress test results;

• German confidence continues to decline according to Ifo surveys;

• US services PMIs seen pulling back slightly in October;

• Caution expected ahead of FOMC decision on Wednesday.

US futures are pointing marginally to the downside ahead of the open, tracking similar losses being made in Europe at the start of the week.

Everything was looking more positive earlier on in the session but it seems that the relief that came from the results of the stress test results has been short-lived. I imagine this hasn’t been helped by comments from ECB Vice President Vitor Constancio who claimed that the tests did not take into consideration a deflationary scenario because they didn’t consider that it was going to happen.

This seems completely ridiculous given that inflation is currently at 0.3% and was below 1% while the tests were carried out. These tests are meant to take into consideration the worst case scenario and for some bizarre reason, they have failed to do so because the very people that have been wrong on inflation repeatedly over the last couple of years, didn’t believe it would happen. It’s no wonder the relief was short-lived.

Of course there are positives to take from this in that a number of banks have raised capital in order to pass the stress tests and are therefore in a better position to face a financial crisis when it occurs. This will have rebuilt some of the confidence lost in the banks over the last four years. However, it’s all well and good having a banking system that is able to lend but unless there are people and businesses that want to borrow, it won’t happen. At a time when the eurozone is stagnating, confidence is on the decline and deflation is a risk, there is very little incentive for people to borrow.

We saw more evidence of confidence in the euro area dwindling today in the German Ifo readings for October. All three numbers declined and fell short of expectations which is very disappointing given that we’d seen signs last week that the country is potentially turning a corner, with improvements being seen in the PMI and ZEW readings.

The start of the week in the US is looking pretty quiet, with only a couple of pieces of data being released and the number of companies reporting third quarter earnings significantly reduced. The October services PMI reading is expected to fall slightly to 58 this month, which may worry people in the current market environment in which people panic very easily. In reality, despite the services sector making up more than two thirds of UK output, this shouldn’t cause any concern as it’s still a strong figure and all other data points to a strong US economy, by current standards.

The start of the week may see a little caution on the part of investors due to the Fed meeting on Wednesday when the QE3 program is expected to come to an end. While there have been murmurings that it could be delayed or even increased, this is very unlikely and the chances are that the final $15 billion taper will take place and be accompanied by dovish comments to ease concerns over the timing of the first rate hike.

The S&P is expected to open 1 point lower, the Dow 4 points lower and the Nasdaq 1 points lower.