GB: CIPS/PMI Services Index

Wed Oct 04 03:30:00 CDT 2017

Consensus Actual Previous
Level 53.2 53.6 53.2

Following a disappointing 11-month low in August, activity rates in UK services seem to have picked up slightly in September. The sector PMI stood at 53.6, a modest 0.4 point rise versus mid-quarter and a little firmer than market expectations. However, the latest reading was still weaker than the average recorded over the first half of the year.

Indeed, much less promisingly, growth of new business eased to its slowest rate in thirteen months while Brexit concerns saw business confidence drop to one of its worst levels since end-2011. Even so, job creation remained solid, growth here dipping only marginally from August's 19-month high, and a number of firms reported shortages of suitably skilled staff.

Building capacity pressures were also reflected in a rise in input cost inflation to its strongest mark in seven months. Importantly, higher wages were cited as one factor here. At the same time, service provider charges were also raised significantly.

For the BoE MPC, today's report is something of a mixed bag. September seems to have been a reasonable month for the services sector and inflation pressures, crucially wages, are on the up. However, the forward indicators of activity have cooled notably warning that the fourth quarter could see a renewed loss of momentum. As it is, the third quarter PMI average (53.5) was already short of its second quarter mean (54.3). Still, with inflation clearly a growing concern at the Bank, a 25 basis point hike in Bank Rate in November is still on the cards.

The Services Purchasing Managers' Index (PMI) provides an estimate of service sector business activity for the preceding month by using information obtained from a representative sector survey incorporating transport and communication, financial intermediation, business services, personal services, computing and IT and hotels and restaurants. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The data are compiled by the Chartered Institute of Purchasing and Supply (CIPS) and Markit.

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.