ADP May Spring Markets Back To Life After Mixed PMIs

A mixed batch of economic data from Europe on Wednesday morning is providing little direction for the financial markets at a time when investors are already likely tread with caution with the ECB meeting and US jobs report still to come this week.

So often when such potentially volatile events approach, investors will take shelter and wait for the storm to pass and it looks as though this week is no different. Of course, this is never helped when we get a mixed bag of data from Europe which offers little direction to those willing to trade ahead of these events. The PMI readings from the UK and the Eurozone were quite disappointing, falling below expectations in most cases.

That said, none of the readings fell below 50 that would indicate a contraction in the services sector, which I find encouraging. At the same time, the Spanish PMI reading fell but remains quite high at 56.2, which combined with other economic indicators such as falling unemployment, a weaker currency and lower oil prices which effectively offer a tax break for consumers, suggests the economy is finally on the road to recovery.

Meanwhile, eurozone retail sales in January rose by 1.1% compared with December. This is the largest monthly increase since May 2013, resulting in 3.7% annual growth which is not something to be disappointed about. I’m sure that lower oil prices will have played a large role in this rise in consumer spending but that shouldn’t matter as long as prices remain low, which many people expect them to. This effective tax break gives people in the eurozone that have been hammered by austerity the opportunity to deleverage while at the same time spending more which provides an economic boost. As far as the eurozone is concerned, it’s win win.

Brent crude has continued to hover just above $60 this morning, with disruptions in Libya acting to support prices. Saudi Arabia’s decision to raise prices to Asia and the US yesterday on the belief that demand is recovering may provide further support for Brent Crude prices although there are downside risks as well, with a potential increase in Iranian supply if negotiations over its nuclear program with P5+1 go well. With production still on the rise even though the rig count has fallen repeatedly, I still see more downside potential despite the best efforts of the Saudi’s, although any move to the downside will probably be limited at this stage.

While European data offered little for investors, the same may not necessarily be true of the US releases today. The ADP figure in particular has the potential to bring the markets back to life. While the ADP is generally viewed as an unreliable estimate of the official non-farm payrolls figure, which will be released on Friday, any significant moves away from the consensus can be seen as a sign that forecasts for the official reading are also off. For example, a much better than expected ADP reading today can make investors much more optimistic ahead of Friday’s release and that can move the markets.

The ISM non-manufacturing PMI is another that investors pay close attention to and can therefore shake things up a little. The services sector is so important to the US economy and any change in confidence is seen as a sign that the economy may slow later in the year.

The S&P 500 is expected to open 9 points lower, the Dow 65 points lower and the NASDAQ16 points lower.

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