Disappointing US data fuel downturn concerns

OVERNIGHT

Asian equity markets are mostly down today. That followed declines in US equities that reflected increasing concerns about a potential recession after a key measure of US services activity disappointed. In contrast, China’s Caixin services PMI, a measure of domestic demand, rose to its highest level since November 2020 following the easing of Covid restrictions.  

THE DAY AHEAD

With Easter fast approaching today’s economic calendar is inevitably light. In the UK, the March PMI construction will give a timely update on a highly cyclical sector. The composite index for activity in February surged to its highest since May 2022 so it will be interesting to see if it has maintained that momentum. For construction, it reflected rebounds in both commercial activity and civil engineering, while in contrast housing activity fell for the third month in a row.  The February survey also said that input cost inflation was at its lowest since November 2020 and supplier delivery delays at their lowest since January 2020. However, wage costs were still noted as rising and that was seen as holding back recruitment. 

Also of interest in the UK will be the latest readings for the Bank of England’s Decision Makers panel survey. Last month’s update for February saw businesses’ expectations of inflation in their own prices and their expectations of consumer price inflation as a whole both decline. Further falls may be seen for March, particularly as the survey will have been conducted before the release of data showing higher than expected February CPI inflation. Less positively the last survey pointed to ongoing issues with recruitment and labour costs.

In the US jobless claims will provide their usual weekly indication of labour markets trends. Initial claims remain unusually low, an indication that the labour market is still tight despite anecdotal reports of rising layoffs particularly in the tech sector. The detailed monthly labour market report for March is out tomorrow. 

While UK markets are closed for Easter tomorrow those in the US are open and will be focused on the labour market update. US nonfarm payrolls surprised to the upside in the first two months of the year. That may have been in part due to unusually mild weather but nevertheless, we expect another sizeable rise in employment of 250k in March along with a dip in the unemployment rate to 3.5% from 3.6%. That would lend little support to market hopes for lower interest rates later this year. However, the wage data may be more helpful as recent updates have shown wage growth slowing despite the tight labour market and a further deceleration in annual growth seems likely this month.   

MARKETS

US Treasury fell again yesterday helped by the weaker-than-expected US services data while UK gilt yields were little changed. In currency markets sterling rose against the euro but dipped against a generally stronger US dollar.