Good morning.
Opportunity cost of EU referendum becomes more apparent as UK services sector knocked by lack of confidence
Although yesterday’s Services PMI release was slighter firmer than expected (53.7 vs. 53.5) it remains well below the longer-term trend seen throughout much of 2015. The survey data showed the first three months of this year to be the poorest in terms of overall growth in activity in three years and the bad news didn’t stop there. The data providers, Markit, highlighted that incoming new business rose at the slowest rate since January 2013. As such, it’s highly unlikely that Q4 2015’s growth of 0.6% will be sustained – with most banks now eyeing a growth rate of around 0.5%. This might not sound like much, but that equates to the economy decelerating at a rate of almost 17%. This rather negative tone helped assist GBP lower throughout yesterday’s session, falling toward (but not quite through) 1.24 against the euro.
Consensus among Fed members (or lack thereof) critical to market expectations of rate trajectory
Today’s minutes from the Federal Reserve’s latest rate-setting meeting are likely to come under scrutiny as markets look to gauge the extent of dissatisfaction among some Fed members on the current path intended for US rates. Janet Yellen last week outlined a number of unfulfilled requirements that are necessary for the Fed to continue shifting interest rates higher. However, some of the board have expressed their diverging opinions since Yellen’s speech. Fed’s Eric Rosengren of the Boston Fed supported the dollar on Monday after stating his belief that the market is currently underpricing the Fed’s rate path trajectory and he sees more and faster rate hikes than the market is currently expecting. Rosengren is one of the more dovish members of the Fed (favouring lower interest rates in order to meet economic goals), so it’s highly likely that other voters on the board support this view. The Fed minutes are due at 7pm UK time.
Asian equities supported by modest oil rally and stronger Chinese narrative
China’s Caixin Services PMI showed accelerating growth in the services sector across March, broadly fitting in with the current narrative in China: rebalancing away from dependence on manufacturing to a more finely tuned and protected economy. Although the growth rates are still relatively modest, it’s to be expected from a slowly maturing sector in an otherwise tumultuous market. In energy markets, after shedding almost 10% of its value since mid-March, oil firmed slightly overnight, assisting gains across Asian equity markets with the exception of Japan -the Nikkei 225 has suffered the longest losing streak in three years after closing lower this morning – to the detriment of USD/JPY, which briefly fell below 110.00 for the first time since late 2014.
Outside of the FOMC minutes, the data calendar is relatively quiet, but speeches from Fed’s Mester and Fed’s Bullard later today will be closely watched for signs of disillusionment with the rate path outlined by Yellen last week.
Have a great day.