March service sector indicators in focus

OVERNIGHT

Asian equity markets are mixed this morning. The New Zealand central bank surprised markets with a larger than expected interest rate increase of 50 basis points. Its statement also did not rule out further rises and markets are discounting at least one more hike of 25bp. In Australia, the central bank governor warned that Tuesday’s decision to leave interest rates unchanged did not necessarily mean that they have peaked. German factory orders data for February posted an unexpectedly large increase of 4.8%.

THE DAY AHEAD

Today’s release calendar is dominated by March services data. Recent updates have painted a stronger picture of activity than within their manufacturing equivalents and that is likely to be the case again today.

For the UK and the Eurozone, the PMI releases will be second readings that are not expected to be much revised. The first report for the UK noted that services activity was expansionary but at a slower pace than in February. New orders were at their highest since March 2002 suggesting that growth should accelerate, despite a tight labour market remaining a constraint to activity. For the Eurozone, the headline activity index rose to a 10 month high in March and the high level of new orders pointed to faster growth ahead. 

The US ISM services index for March is published today. In February, the headline index slipped modestly to 55.1 from 55.2. That is a level historically consistent with strong output growth. The orders subcomponent also rose to its highest since November 2021, providing indications that services activity could accelerate further. The already released US Services PMI for March surged to its highest level since April 2022. The two measures do not always move in tandem, but on this occasion, this may be a stronger signal of another rise in the ISM index. This ongoing strength in services activity clearly casts doubt on market expectations of sizeable US interest rate cuts later this year.

Already released data for February which showed a small rise in the US trade in goods deficit points to a similar sized rise for the overall deficit today. Finally, the March ADP measure of private sector jobs growth will, as usual, be closely watched for clues to Friday’s NFP data. However, despite last year’s revamp, it is still not proving to be a reliable predictor.

The Bank of England’s Silvana Tenreyro will speak for the second day in a row. Yesterday, she said that an early sharp cut in interest rates is probably now required to stop inflation from eventually falling well below target. 

MARKETS

US Treasury yields fell again yesterday following some weaker than expected data on job vacancies, before posting a recovery overnight. UK gilt yields in contrast were little changed. The US dollar posted another fall against the euro and touched a new low for the year against sterling.