Events and Reports To Be Watched

Events,  Reports, To Be, Watched, Macroeconomics, PMI, Eurozone, stable rate, fx trader, forex

03 Feb 2017

Ahead of the weekend, there are two series of economic reports. The first are Europe's service PMI reports and the second is the US employment report. Neither report is likely to alter views significantly, but the latter has greater potential to move the market.

The Eurozone economy appears to be expanding at a stable rate, somewhat above what is regarded as trend growth. It grew 0.5% in Q4 and 1.8% year-over-year (2.0% in 2015). The flash service sector reading was 53.6 (53.7 in December). The composite flash was 54.3 (54.4 in December). The challenge for monetary policy is not so much focused on growth as prices. Headline inflation has picked up, and the deflation risks appear to have passed.

However, the increases in prices do not yet appear sustainable. They, by and large, reflect energy prices and the past depreciation of the euro. Specifically, the core rate, which bottomed at 0.6% has only been lifted to 0.9%, whereas the headline is near 2%. Moreover, later this year, as the base effect wanes, even headline inflation may ease.

The Bank of England may have stolen any thunder from the today's service and composite PMI. The BOE raised its growth forecasts and still seemed to want to look through the near-term inflation overshoot. It still sees Brexit being a drag on growth but less than previously. The January service PMI is expected to ease to 55.8 from 56.2, and the composite is anticipated to have slipped to 56.0 from 56.1. The composite would still be above the three, six, and 12-month averages (55.6, 53.6 and 53.5 respectively.  Such a report is unlikely to provide new incentives for traders or shift the focus from Brexit.

Although there is not always a good month-to-month match between the ADP estimate and the BLS private sector non-farm payroll report, the large upside surprise in the former appears to reduce the risk of a downside surprise in the latter. The median forecast in the Bloomberg survey is for a 175k increase in private sector employment (180k overall) up from 144k in December (156k overall). Our bias is toward a slightly greater job growth than the median.   The revisions to back months may attract more attention than usual as benchmark revisions are announced with the January figures.

Given the current context, average hourly earnings may be of greater interest than the headline figures. Nearly 40% of the states and several cities increased the minimum wage at the start of the year. This gives a little upside risk to the 0.3% increase in average hourly wages that the median forecasts. In December, a 0.4% increase was reported for a 2.9% year-over-year rate.  In the last two years, minimum wages were also lifted at the start of the year in many states. In January 2015, average hourly earnings rose 0.6%, and in January 2016, they rose by 0.5%.