UK services had a better month in October. Following a surprisingly sharp reversal in September the sector PMI rebounded 1.6 points to 54.9, its first rise in four months and stronger than market expectations.
However, the latest headline reading was still the second weakest since May 2013 and remained short of its long-run average (55.2). Moreover, while still firm on an historical basis, new business growth failed to accelerate from September's 29-month low and backlog accumulation was only mild. Employment expanded again and the rate of job creation even touched a 5-month high but business expectations declined to their weakest mark in two and a half years.
Cost pressures were quite subdued once more and input inflation slowed for the fourth time in the last five months to equal its slowest rate since September 2009. At the same time, service provider charges continued to rise only marginally.
Taken together with the surprisingly strong gain already reported in manufacturing, the pick-up in October's service sector PMI suggests that the economy had decent momentum at the start of the current quarter. The composite output index advanced 1.8 points to 55.7 and GDP growth looks to be running at around a 0.6 percent quarterly rate. This should be firm enough to ensure that speculation about the next change in Bank Rate stays on the upside but with inflation pressures still so weak, it most likely remains many months away yet.
The Markit/CIPS UK Services PMI covers transport & communication, financial intermediation, business services, personal services, computing & IT and hotels & restaurants.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM non-manufacturing index in the U.S. and the Markit Services PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI services data give a detailed look at the services sector, how busy it is and where things are headed. The indexes are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.
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