Services Sector And ADP The Next US Hurdles For Dectaper Fans To Clear

Euro continues to pile higher against the USD and JPY before the ECB meeting tomorrow, with markets seemingly less worried by the recent news around disinflation and potential outright deflation. A hint of caution before the upcoming flood of US jobs data will have also caused the USD to weaken across the board. We receive both the ADP employment change and the employment sub-component of the services ISM this afternoon.

Yesterday’s factory gate inflation numbers from the Eurozone made for further unpleasant reading. Eurozone PPI fell more than anticipated as deflationary fears accelerated into factory input costs. The big dip once again was in energy goods prices; a function of the continual slips we have seen in oil markets in the past month or so. Overall prices fell by 0.5% on the month and were 1.4% lower on the year. The fact is, however – and the reason for euro strength – that despite this figure, we are unlikely to see any form of rate policy movement from the ECB tomorrow.

We are also unlikely to see any policy changes from the Bank of England although any statement attached to the decision may reconfirm the decision to cut 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 pop sterling higher.

Sterling continues to charge onwards following further optimism from the construction sector. Following Monday’s manufacturing outperformance, construction PMI rose to a 6 year high confirming that the UK housing economy is on a tear at the moment. Forward looking sub components such as employment and new orders rose handily, combining to see broad growth over the sector. Residential construction hit the highest level in 10yrs in November.

We had feared that this would be a purely residential fuelled expansion, but it seems that while residential is the strongest, commercial and infrastructure spending is also going well. The key to the continuation of this growth will be lead times; can the construction sector keep up with this new found demand?

AUD has remained on the back foot following yesterday’s central bank comments as GDP has disappointed. Growth was expected at 0.7% QoQ in Q3 and 2.6% higher compared to this time last year but only managed to pull in 0.6% and 2.3% respectively. Mining weakness and inconsistent investment income has made the growth picture increasingly weak difficult in Australia. This definitely keeps the easing stance of the RBA in focus and I would wager that merely a month of bad data from Australia and/or China could be enough to push rates lower at the following meeting.

Today’s data emphasis is placed on the services industries of the world economy. In the developed world, these will give us a better glimpse of how the overall economies are performing given the heavier weighting of GDP that they contribute to. Once again it is France that is expected to let the European side down with a sub-50.0 reading although Germany’s monster 54.5 expectations will be enough to drag the overall Eurozone services industry into expansion.

The UK’s number is due at 09.30 and is expected to remain close to the 16yr high seen last month. This could see new YTD prices seen in GBPEUR and GBPUSD should it follow construction and manufacturing in smashing estimates.

Much like Monday’s manufacturing ISM we will closely watch the employment and new orders components of today’s services number at 3pm. Alongside the ADP jobs number at 13.15 GMT – expected at 170k – this will make or break the USD into Friday’s payrolls announcement.