Chinese Services PMI Signals Further Slowdown

Daily Analysis - 03/03/2016

Services PMI Signals Chinese Growth Slowing


As the Chinese economy pivots from an export-dominated bias towards an increasing focus on the services sector, recent PMI data corroborates fears that the country may sliding into a period of tapering growth despite additional efforts undertaken by the People’s Bank of China to help boost the economy.

UK Construction Activity Slows

The Chartered Institute of Purchasing and Supply reported a fall in United Kingdom Construction Purchasing Manager’s Index. Construction grew at the weakest pace in 10-months, printing at 54.2 in February after missing expectations of 55.5 and prior month’s 55.0. This is the second consecutive month of construction having slowed down as the concerns about the looming EU referendum vote and possible “Brexit” are reflected by customers suspending building projects while contractors cut back on hiring. Although the Bank of England has kept interest rates at record low levels of 0.50% in order to help spur the economy, recent statements have seen officials stress that the central bank is prepared to provide more stimulus if necessary to accommodate conditions ahead of the Brexit referendum on June 23rd. The Pound rallied against the US dollar following the report, climbing back above the critical 1.4000 level to as high as 1.4093 during the session.


US Job Creation Remains Strong

The labor economy in the United States which remains a key indicator for monetary policy from the Federal Reserve, managed to surpass expectations for the month of February. Automatic Data Processing reported 214,000 nonfarm jobs in private firms were added during the period, surpassing both expectations and the prior month’s revised values of 190,000 and 193,000 respectively. Most of the job creation came from the services sector which notched 208,000 additional jobs while manufacturing and construction added a mere 5,000 jobs and factories scrapped 9,000 jobs. The US labor market continues to be the primary momentum driving growth in the economy as evidenced by the most recent GDP data report indicating an improvement in fourth quarter GDP to 1% expansion, boosted in large part by consumer spending. The Dollar ended the session modestly weaker against the Euro, with the EURUSD pair closing higher at 1.0867.


China’s Services Growth Tapers

While the growing emphasis on the services sector might help to offset losses in the Chinese export economy, services are began showing additional weakness in February. According to the Caixin Services PMI released overnight, the Purchasing Managers’ Index remained in expansionary territory at 51.2, but printed below the January’s 52.4 reading after missing expectations of 52.6. The report registered a rise in input costs for the first time whereas activity and new orders over the same period declined. There is a growing emphasis on fiscal stimulus measures following recent comments from People’s Bank of China Governor Xiaochuan’s speech at the G20 meeting, stating that in order for activity to pick up, fiscal policy must accompany monetary policy measures. Even though the recent reserve ratio requirement cut was implemented by the central bank to help boost the economy, the action was deemed insufficient, with economists anticipating further rates cuts in the coming months


Euro Area Producer Prices Sink

Amid growing concerns about the potential for deflation to derail fundamental progress in the region, the European Statistics Office reported a deeper than anticipated decline in the Producer Price Index for the month of January. Data released showed producer prices firmly in deflationary territory at -1%, falling further from December’s contraction of -0.8% while missing expectations of -0.7%. As monthly prices remained unchanged for non-durable consumer goods, the declines were mainly attributed to the price weakness in the energy sector and intermediate goods. On an annualized basis, the price index reported a slight improvement from the previously recorded declines of -3.%, shrinking by -2.9% in January and matching expectations. With the European Central Bank preparing to meet next week, speculation is high that policymakers will choose to announce additional stimulus in its upcoming monetary policy decision as resurgent deflationary fears and preliminary data have confirmed growing concerns.


Upcoming Events

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  • 09:30 GMT
  • GBP
  • Services PMI (February)
  • 55.1
  • 55.6
  • 10:00 GMT
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  • Retail Sales (MoM)
  • 0.10%
  • 0.30%
  • 15:00 GMT
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  • 2.00%
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  • ISM Non-Manufacturing PMI (February)
  • 53.2
  • 53.5

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