Market Update December 4

US service sector growth accelerated sharply in November with the ISM’s PMI gauge rising to 59.3. The figure, well above the 57.1 level of October and expectations for an increase to 57.5, was the second-highest reading dating back to August 2005. Improvements in new orders, deliveries, customer inventories, backlogs, imports and exports were enough to offset weaker readings on production, employment, inventories and prices paid. While the ISM gauge reported a sharp rebound, there was some notable divergence between it and the separate Markit gauge with the latter falling to 56.2 from 57.1 in October. While they moved in opposite directions, both remain well above the 50 level separating expansion from contraction.

US private sector employment growth missed to the downside in November with the ADP national employment report revealing a net increase of 208k. The reading was below the upwardly-revised 233k increase of October and expectations for a decline to 221k and was the lowest gain recorded since August.

US productivity was revised higher in Q3, rising 2.3% from 2.0% in the initial estimate as output rose 4.9% compared to a 2.5% gain in hours worked. While that was an upgrade, it was the opposite on labour costs which declined 1.0%. The reading was below the 0.3% initial estimate and short of expectations for flat growth overall.

The Beige Book, the US Federal Reserve’s report on economic conditions, was released overnight with the document stating that ‘national economic activity continued to expand in October and November’ with employment gains ‘widespread across all districts’. As several have also communicated in recent days, lower gasoline prices were seen as a contributing factor for some behind ‘higher consumer spending’.

US home loan demand continued to slide last week with the MBA mortgage market index dropping 7.3%. The fall, the fifth week in six that a drop has been recorded, was the largest weekly decline seen since mid-June. A huge 13.4% contraction in refinancing was more than enough to offset a 2.5% increase in new loans and came despite the average 30-year mortgage rate slipping 7bps to 4.08%.

Overnight the Bank of Canada held rates steady at 1.0%, as expected. In the accompanying policy statement the bank acknowledged that ‘inflation has risen more than expected’ although this was ‘largely due to the temporary effects of the lower Canadian Dollar and some sector-specific factors’. On the risks to inflation outlook moving forward they noted that ‘weaker oil prices pose an important downside risk’ although this was ‘tempered by a stronger US economy’. Given the balanced profile the board deemed that ‘the current stance of monetary policy is appropriate’.

Eurozone service sector growth slowed to an 11-month low in November with the Markit PMI gauge slipping to 51.1. The reading was below the ‘flash’ estimate of 51.3 released in late November and 52.3 figure of October and was the lowest level seen since December 2013. A sharp dip in the French gauge to 47.9, below the flash estimate of 48.8 and 48.3 level of October, along with a slowdown in the Spanish reading to 52.7 from 55.9, were the chief catalysts behind the disappointing headline figure. To view the performance of the four largest Eurozone economies, Germany, France, Italy and Spain, see below or click here for more details.

Germany: 52.1 (Flash 52.1, Est 52.1, Oct 54.4 – lowest since July 2013)

France: 47.9 (Flash 48.8, Est 48.8, Oct 54.4 – lowest since Feb 2014)

Italy: 51.8 (Est 50.2, Oct 50.8 – highest since July 2014)

Spain: 52.7 (Est 55.2, Oct 55.9 – lowest since November 2013)

Eurozone retail sales rose 0.4% in October, missing expectations for an increase of 0.6%, with the annual rate of change remaining steady at +1.4%. Non-food products, along with automotive fuel, made the largest contributions to sales for the month.

As opposed the Eurozone which saw activity slow to an 11-month low, UK service sector activity accelerated sharply in November with the Markit/CIPS PMI gauge surging to 58.6. The figure was above the 56.2 level of October and expectations for an increase to 56.5 with a rise in new orders, along with increased wages growth – something that is sure to interest the Bank of England, largely responsible for the upside headline beat.


The Day Ahead (AEDT)

The ASX 200 looks set to extend its rally into a third session today with SPI futures pointing to a gain of 12pts on the open. While commodity prices were mixed overnight, something that could potentially spark profit taking in the miners and energy sector after two days of solid gains, given increased chatter about further rate cuts from the RBA it’s likely that the index will continue its recent pattern of grinding higher over the course of trade. On a sector-specific basis the retail sales data released at 11.30am will be influential on both consumer discretionary and staples. Still, even if weak, it may actually benefit the overall index given it’ll add to calls for future easing, hence benefit yield plays.

The AUDUSD has remained under pressure overnight with the pair continuing to oscillate around the .8400 level. Given constant buying below this level it will have to take some exceptionally weak retail sales and trade figures at 11.30am, or another significant move higher in USDJPY, to see support at this level crack today. Keeping that in mind, with short-term positioning and sentiment already so poor towards the Aussie, the risk is for a mild squeeze higher today should we get stronger-than-expected data. Support kicks in below .8400 with further buying likely at .8350 and .8315. On the topside resistance is located at .8430, .8460 and above .8480,

Australian retail sales and international trade data for October will be released at 11.30am this morning. Having surged 1.2% in September, partially as a result of the release of the iPhone 6, retail sales are expected to coming in flat on the back of the higher base effect from September. On the trade front the deficit is expected to narrow to $1.9b from 2.26b. On what is an otherwise bare regional calendar revised South Korean Q3 GDP is the only other release of note.

The Bank of England and European Central Bank both announce their December monetary policy decisions later in the evening. The Bank of England will leave the bank rate and asset purchase program unchanged at 0.5% and £375b respectively, that is a given, meaning all attention this evening will be on the ECB and, in particular, Mario Draghi. Having talked up the prospect for sovereign QE on several occasions since they last met markets will be looking for further assurance that the ECB will begin this program should the outlook for inflation continue to deteriorate.

Data releases this evening include initial jobless claims and the Challenger layoffs series in the States along with Ivey PMI from Canada.


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