Dreadful numbers from the services sector on Wednesday – the worst since PMI data was introduced in 1996.
The headline rate of 42.4, down from 46 in September and 53.1 a year ago, has come in well below City forecasts.
Cue a sterling sell-off ($1.5794) and a recalibrating of interest rate expectations when the Monetary Policy Committee meets on Thursday. The FTSE 100 was already off 110 points at around 44525.
From analysts at Barclays Capital, writing before the numbers appeared:
We think that the UK services PMI data released today are more important than usual. As always it is one of the indicators looked most closely by the MPC as it is the best guide they have to service sector, which is most of the economy. But this month’s reading is even more important, in our opinion. Q3 GDP was markedly weaker than expected and Q4 had previously been generally viewed as the start of the real problems. This month’s services PMI is an important gauge to how likely it is that Q4 GDP growth will be weaker than in Q3.
The market is currently pricing close to a 75bp cut by the MPC this week. The MPC could go 50, 75 or 100. We think 50 is the most likely outcome but a very weak services PMI number today (<43) could lead to larger cut of 75bp or 100bp. We are in line with the consensus forecast for a decline in the PMI services index to 44.5 from 46.0. Our view is if the MPC does cut rates by 50bp, GBP will see a modest sell off, but that a 100bp cut could lead to an immediate sell off and then potentially a rally. We continue to prefer remaining short GBP for the moment, but if the MPC do cut rates by 100bp, then buying the GBP on a dip could yield some short-term gains.
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