Article / 27 September 2016 at 5:06 GMT

3 Numbers: Looking for a rebound in US Services PMI

editor/analyst / CapitalSpectator.com
United States
  • UK CBI Distributive Trades Index to help answer the post-Brexit vote question
  • Brazil's consumer confidence index to hint at country's recovery prospects 
  • A rebound in US Services PMI will point to overall economic strength

By James Picerno

The UK economy’s prospects in the post-Brexit vote era are in focus today with the release of retail-sector sentiment via the CBI Distributive Trades Index. We’ll also see September reports on consumer confidence in Brazil and the flash data for the US Services PMI.

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 Is Britain’s consumer sector simply shrugging off Brexit worries and returning to business (and spending) as usual? Photo: iStock

UK: CBI Distributive Trades Index (1000 GMT) Today’s sentiment update for the retail sector offers another test for Britain’s post-Brexit vote era. Recent data overall suggest that the economy is holding up better than initially expected. Although growth has slowed, several reports published since the UK voted to leave the European Union in June imply that a new recession may not be destiny after all.

Retail spending in August, for instance, showed an “underlying pattern … of growth,”  the Office for National Statistics said last month. Although the volume of sales ticked lower by 0.2%, spending was up a solid 6.2% for the year through August — the second straight month of year-over-year growth above the 6.0%.

Meantime, survey data for the services and manufacturing sectors posted encouraging rebounds in August, offering two more clues in support of the idea that the UK economy was stabilising after the Brexit vote in June.

Today’s update from the Confederation of British Industry (CBI) will offer an early look at economic conditions in September. In the August release, the Distributive Trades Survey, which tracks sentiment in the retail industry, increased sharply after slumping in July.

The 9% reading, a six-month high, represents a nine-percentage-point edge for retailers reporting higher year-over-year sales volume in August compared with companies that said volume was lower (35% less 26% = 9%).

The question is whether the August bounce was a one-off event. Or is Britain’s consumer sector simply shrugging off Brexit worries and returning to business (and spending) as usual? Today’s CBI update will be widely read in search of a preliminary answer.

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Brazil: Consumer Confidence Index (1100 GMT) Brazil’s recently installed president, Michel Temer, last week told the United Nations General Assembly that “confidence is being restored” to the economy.

There’s a degree of support for his upbeat view, courtesy of the rise of a closely tracked benchmark of sentiment in the consumer sector. The FGV Consumer Confidence Index increased in August for the fourth month in a row, reaching the highest level since January 2015.

The biggest contribution to last month's rise came from an improvement in satisfaction with the current situation. “This was a favorable sign, considering there was an improvement in consumer perception in regards to both the job market and the financial situation of households,” according to FGV.

The country still faces many challenges, however, including a political climate that’s complicated, to say the least. Temer’s installment last month inspired a new round of optimism that Brazil’s tortured politics may normalise in the months ahead. But this week’s arrest of the former finance minister on corruption charges implies that the future may be no less volatile than it was under the former president Dilma Rousseff, who was removed from office in August.

A buoyant mood among consumers, on the other hand, will help smooth over rough edges. Will today’s update deliver another round of improvement? The stakes are still high, particularly after learning that the central bank’s Economic Activity Index, which is considered a proxy for GDP changes, was surprisingly weak in August. The 0.09% decline is a reminder that pulling free of Brazil’s deep recession is going to be a long and bumpy road.

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US: Services PMI (1345 GMT) The services sector turned weak in August, according to sentiment surveys. Will subdued economic activity roll on in today’s preliminary estimate for September?

Last month’s PMI fell to 51.0, a six-month low. Although that’s still above the no-change 50 level, the downside bias of late is starting to look worrisome. The softer trend was confirmed by the slide in the ISM Non-Manufacturing Index, which fell to its lowest reading in more than six years last month. Although the ISM data still aligns with growth, the expansion in output has slowed to a crawl.

“The weak PMI readings send a downbeat note on economic growth in the third quarter,” said the chief economist at IHS Markit earlier this month, with the release of the August profile. Combined with the softer PMI data for manufacturing, the two PMI reports imply a GDP growth rate of just 1% for the third quarter, he advised.

But the outlook is considerably brighter based on the Atlanta Fed’s GDPNow forecast. The model’s September 20 estimate calls for a solid 2.9% increase in third-quarter GDP, which is due for release in late October.

If the forecast is right, US output is on track to post a solid rebound after three quarters of tepid growth at a roughly 1% pace, based on quarterly comparisons for seasonally adjusted annualised data.

If economic activity is set to pick up, there should be some evidence in today’s flash PMI report for September. Otherwise, another decline will deepen concern that the all-important services sector may be headed for trouble.

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– Edited by Susan McDonald

James Picerno is a macro analyst/editor at CapitalSpectator.com. Follow James or post your comment below to engage with Saxo Bank's social trading platform.



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