UK Services PMI May Determine BoE on QE

Europe remains in focus as Italy finally downgraded by Moodys, UK Services PMI could determine QE tomorrow, UK Q2 growth set to be confirmed at 0.2%, Eurozone retail sales set to slip back, Australian retail sales jump in August, US ADP payrolls due later. German Sep services PMI contracted to 49.7.

Eurozone debt remains front and centre. Last nights reports that European finance ministers are considering a co-ordinated response to the problems in the European banking sector with respect to a recapitalisation plan is a welcome acknowledgement of the problems, if it turns out to be true. Even so the nervousness within the markets was amply demonstrated within minutes of that announcement by ratings agency Moodys who finally swung the axe on Italys credit rating, cutting it to A2 with a negative outlook , citing increased risk in long term funding as well as increased downside risks to economic growth and to fiscal consolidation. This now leaves Fitch as the last ratings agency not to have taken the clippers to Italy's credit rating after S&P got the ball rolling last month.

On the question of ratings downgrades the problems with respect to Dexia and the creation of a bad bank for about 180bn of bad loans could invite renewed scrutiny of Frances triple A rating given that both France and Belgium have pledged to stand behind the beleaguered lender.

German final Sep PMI services at 49.7, lowest since July 2009 from 50.3 flash and 51.1 in Aug.

In the UK the last of the PMI data is due out with services PMI for September expected to show further weakness from August's 51.1, slipping back to 50.6. Given that services makes up the majority of UK GDP a poor number here, below 50, could well prompt increased speculation about the likelihood of further QE at tomorrows Bank of England rate setting meeting. Yesterdays construction PMI data while disappointing still managed to stay in expansion territory at 50.1, but construction only makes up around 6% of total UK PMI, so is not as important. At the same time UK Q2 GDP is expected to be reaffirmed at 0.2% with the annualised rate staying at 0.7%.

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Also in Europe today the latest euro zone retail sales data for August is due out with expectations of a decline of 0.3%, though this could well be optimistic given last Fridays appalling German retail sales numbers which plunged 2.9%, well below expectations of -0.4%. European services PMI data for September is also due for release and this is expected to remain in contraction territory at 49.1. European services PMI for September is also expected to be confirmed in contraction territory at 49.1.

In Australia retail sales for August rose 0.6%, well above expectations of 0.2%, household goods and restaurant sales leading the rise, helping the Australian dollar pull back some ground after its recent losses.

Just before the US open the latest ADP employment report for September is due to be released and markets will be hoping for the numbers to at least come in line with expectations.