Article / 05 September 2016 at 5:00 GMT

3 Numbers: European barometers coming on tap

Blogger / MoreLiver's Daily
  • Europe's service barometers suggest moderate growth ahead of ECB meeting
  • Sentix investor confidence expected to improve 
  • Euro area's retail sales seen to increase, following the service barometers

By Juhani Huopainen

The US markets are closed today because of the Labor Day holiday. The trading day will be shorter and suffer from decreased liquidity but by no means is it expected to be dull.

The European Central Bank will be meeting next Thursday and August service sector purchasing manager indices today will be watched closely for any Brexit-effects.

The G20 summit concludes today. At the meeting Japan threatened it would pull its investments from UK unless a trade deal with the EU will be secured.

China warned against protectionism, while offering the US president Barack Obama a cold welcome. Europe was hoped to ease fiscal policy, but unfortunately only Germany has room to do that.

Given how Germany’s local elections went during the weekend, it might even be plausible as the next national elections are getting closer.

Europe August Service Purchasing Manager Index (0500-0830). Today Markit releases the August service sector purchasing manager indices (PMI) for Europe. The consensus forecast is for the euro area’s service PMI to have risen slightly in August to 53.1.

Service PMI table shows the August expected reading, expected change from month ago and the difference from the 50-level. Manufacturing data was released last week:pmi
Chart source: Saxo Bank

The service PMI has been rising since hitting a bottom in June, and are about to rise to levels seen before the Brexit referendum. While the euro area’s number is economically most important, trading-wise Italy and UK will be the most interesting to watch.

Not so dolce: There are fears weakness in Italy could move to the service sector. Photo: iStock

Italy’s manufacturing PMI was much worse than was expected, and sunk below 50, signaling contraction. Probably some of that weakness also translates into the service economy, so the expected small decline might not be enough.

Italy’s banking crisis and the approaching constitutional referendum have increased political risks and the service sector’s outlook could be affected.

The UK has had a string of better-than-expected data releases following the Brexit referendum. The manufacturing PMI exceeded even the most optimistic expectations, but while the weaker GBP obviously helps the manufacturing sector, the currency effect is most likely a negative for the service sector.

Investors are poised for a rise to 50 from July’s 47.4, and before the referendum the index was above 52 – so the expected improvement is not unrealistic.

The market reaction to Friday’s better-than-expected housing data was neutral, so investors have for the moment become saturated with good news from UK.

Markit press releases will be found here.

GBPUSD out of the triangle, but close to post-referendum highs - a possible short?
Chart source: Saxo Bank

Eurozone: Sentix September Investor Confidence 0830.
According to the median forecast the index is expected to improve slightly to 5 from 4.2 in August. The index has been trending lower since its mid-2015 peak and shows no signs of reversing.

With the cheap oil and expectations of quantitative easing, investors’ optimism was high in 2015. The index has a questionable track record. It was pessimistic in early 2009 and mid-2012, and optimistic in early 2011.

sentix long
 Chart source: Saxo Bank

The Sentix index tends to follow the Markit Composite PMI, though it is a bit more volatile and whipsaws more.

Recently, the Sentix has been more pessimistic than the Markit index, so I expect the Sentix index to improve in the coming months - a level of 10 or so would be more appropriate.

Sentix Short
 Chart source: Saxo Bank

Euro area July Retail sales (0900): Retail sales in July are expected to have increased by 0.6% from a month ago and 1.9% from a year ago. That would be the best year-on-year growth since last March, and given the improving service PMI, not that far-fetched.

While July’s data is already “old news”, the uptick would be a welcome confirmation of the positive signal that the service PMIs have already presented.

-- Edited by Adam Courtenay

Juhani Huopainen
is is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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