Sterling Tumbles after Poor Services PMI, EUR/GBP to Retest Record High

Sterling tumbles sharply after the release of worse than expected services PMI. UK services PMI surprised on the downside to 40.1(consensus: 41.2, Oct: 42.4), the 7th straight month of contraction and the lowest level since the index began in 1996. Readings of employment, incoming new business, outstanding business and business expectation were all at record lows. Earlier this week, the UK reported manufacturing and construction PMI whose declines were sharper than market anticipated. Poor data indicated weak economic conditions in the nation and underscored BoE's aggressive rate cut in the meeting tomorrow. Markets expect another 100bps cut but the BoE might surprise the market again by a deeper cut.

Technically speaking, the Pound resumed its weakness earlier this week and remains pressured. EUR/GBP soars to 0.8608 today and is set to take out 0.8660 towards 61.8% projection of 0.7808 to 0.8660 from 0.8234 at 0.8761. GBP/USD's fall from 1.5534 resumes and is set to retest 1.4557 low. GBP/JPY also weakens to as low as 136.32 so far.

Other data saw retail sales in Eurozone shrank -0.8% in October, worse than consensus of -0.4% and 0% (revised from -0.2%) in September, amid rising unemployment and weakening consumer confidence. On annual basis, the figure came in at -2.1%, also lower than market's expectation of -1.4%. September figure was also revised upward to -1.4%. Sales of food, drinks and tobacco products fell 0.5% that of non-food products lost 0.9% in October.

Eurozone revised down the final number for November's services PMI to 42.5 from 43.3 initially. Falling from 45.8 in October, the figure marked the sharpest drop in 10 years and the 6th consecutive month that the sector is in contraction. Composite PMI for November also fell more than expected to record low at 38.9 from 43.6 in October. Moreover, the German figure was also revised to 45.1 from 46.2, compared with 48.3 in October. Readings for new business, input and output all dropped sharply.

Looking ahead, US November ISM non-manufacturing Index is likely to sink from 44 to 42.5, hitting a record low in 11 years. Price paid component will likely continue the fall from Jun's peak of 84.5 and drop further from Oct's 53.4. Employment component will likely deteriorate further from Oct's 41.5, showing deeper contraction.

A bunch of employment data will be out in US session today. The ADP national employment report will probably show 200k private sector jobs lost in November, after a 157k decline in October. The ADP payroll data tracks employment in goods-producing sector more correctly than in service-producing sector, whose growth has often been overestimated. Therefore, one should focus more on the goods-producing sector for predicting Friday's non-farm payroll report. Q3 productivity growth is expected to be revised down to 0.9% QoQ from 1.1% in the preliminary report while labor costs should remain unchanged at 3.6%. Challenger planed job cuts will also be released.

To be released at 1900GMT, Fed's Beige Book will be based on conditions from the second week of October through November 24. During the period, economy have worsened substantially and this latest report is expected to be more bearish than the previous one which already indicated every region of the US was in recession and consumer spending, manufacturing and service sectors were contracting.

Economic Indicators Update