ISM And Beige Book Disappoint After Strong ADP, Osborne Statement Due

Yesterday’s data emphasis was placed on the services industries of the developed world. Arguably apart from Germany, in the developed world, services growth means overall growth. Without a strong service sector and consumer base, Western economies are in trouble.

European PMIs were a story of divergence. France’s number was always going to disappoint but few had foreseen such a demise. The fall to 48.0 was the lowest since June of this year and undid most of the growth seen in the past 2 months. Put that against the German number of 55.7; the highest since Jan ’13. These are meant to be the 2 largest economies in the Eurozone, yet they could not be more different at the moment. The overall Eurozone measure is almost useless as a result of this divergence. The overall weakness is the true story following large dips in the Italian measure as well.

The UK story was different once again. Following a 16yr high last month you could possibly expect a slight softening of growth in the UK services sector. Growth still remains strong however, as it’s by far the best performing service sector in Europe at the moment. The fact that the index now sits at a 5 month low is entirely relative.

Encouraging news comes from the backlogs component which rose sharply; companies had to increase lead times due to a lack of staff that were able to fulfil orders. This should lead to an expansion of jobs growth in the sector as long as confidence continues to recover back towards its long-term average. Consumer facing businesses are still a concern as we believe that real wage declines are likely to impact the retailers sooner rather than later. We would also not be surprised if consumers spent less in November in order to make sure they had enough in their back pockets for the Christmas period. While the overall figure has disappointed, the story around the UK economy remains strong and Q4 growth has remained robust in November.

Sterling slipped back after this number and dollar put its running shoes on following a much better than expected ADP jobs readout. 215,000 jobs were added in November compared to the 170,000 expectation whilst October’s number was revised higher, from 130,000 to 184,000. While the initial figure is strong the revision is very telling; revising the previous number by 54,000 jobs up to where jobs have recently trending means that the 130k figure was the outlier and not the 204k jobs added, according the most recent NFP survey.

This set up Friday’s jobs report, interestingly with those looking for a December tapering of asset purchases now all the more enamoured with the prospects of a figure breaching the 200,000 mark.

Two things have weakened the dollar post-ADP however. Firstly, the news from the US service sector disappointed following the strong manufacturing survey on Monday. Services ISM fell to the lowest since June with the jobs component also slipping heavily. The second was the rather tepid appraisal of the US economy shown in the survey of regional Federal Reserves we call the Beige Book. The economy grew at a “modest to moderate pace” between early October and mid-November. They also commented that “the government shutdown dampened manufacturing and tourism in some areas and many retailers had a tepid outlook for the holiday sales season”. Not the most encouraging of surveys you would have to say.

The big news in the UK today will be the Chancellor’s Autumn Statement. George Osborne will stand up safe in the knowledge that the UK economy is currently the best performing in the G10 and that growth estimates are set to be increased by the most this century. The Office of Budgetary Responsibility is likely to revise upwards growth forecasts for 2013 from 0.6% to around 1.5% while moving 2014’s from 1.8% to around 2.4%. We will also be looking to see whether the OBR estimates the UK will see a budget surplus in the near future – something that would eventually lead to tax cuts according to David Cameron. That being said, I think there may be something hinted at for the Budget in the form of help for those families as a result of struggling real wages; fuel bills would be my guess.

In the meantime we expect to see this statement remain very fiscally neutral; any spending hikes will be offset by tax rises. Sterling will do well if the market believes that the increases in growth alongside the cuts in the budget deficit are sufficient. The Bank of England decision will be a non-event but any statement attached to the decision may reconfirm the decision to cut the Funding for Lending Scheme assistance to banks for the purpose of mortgage lending. This will come with a note about “increased confidence and strength in the UK recovery” and may help sterling higher.

The ECB will remain dovish today despite some recent strong data and a near-term improvement in some inflation metrics, although we are still likely to get growth and inflation revisions to the low-side. Credit data has remained weak through November and liquidity concerns will push the ECB to do something soon – possible cuts to refinancing rate or moves towards negative rates – if a rebound isn’t seen.

Lost in all of this we will get US jobless claims at 13.30 GMT and factory orders at 15.00.