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US Services PMI on Deck

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US Services PMI on Deck

Markit Group will release its monthly gauge of US service activity Tuesday, giving investors a closer look at the pace of business recovery in the second quarter. The April reading fell out of favour with investors after its key findings contradicted the Labor Department’s official nonfarm payrolls report and the Institute for Supply Management’s non-manufacturing index.

The market research firm is expected to show the US service economy expanded at a stronger pace in May, rebounding from a slight drop off that resulted from a slowdown in business expansion. Economists expect the flash reading to be 55.4, up from the final April reading of 55. The April fPMI estimate was initially reported at 54.2.

The 50-mark separates contraction from expansion in the monthly series.

Markit’s April data suggested a lack of pressure on operating capacity, which resulted in the slowest pace of hiring in 13 months. Those findings contradicted official nonfarm payrolls data courtesy of the Labor Department, which showed service providers added 220,000 new payrolls in April.

In total, the US economy generated 288,000 private payrolls in April, the fastest pace of hiring in more than two years. The unemployment rate fell from 6.7 percent to 6.3 percent.

Markit’s report also conflicted with ISM, which said service activity in April rose at the fastest pace since early 2008. The gains were broad-based, with 14 of 18 service industries reporting growth.

Despite the contradictions, April’s reading did provide valuable insights, and suggested there may be more at play in the economy’s poor performance in the early part of the year. According to Markit chief economist Chris Williamson, April witnessed “worrying signs for future momentum.”

Markit reported last week the US manufacturing industry expanded sharply in May, led by the fastest output growth in more than three years. Markit senior economist Paul Smith speculated that the robust pick up will help US GDP rebound strongly in the second quarter.

The Federal Reserve expects a strong rebound in the Q2, which will help the economy accelerate further in the second half of the year. According to market analysts polled by Bloomberg, early Q2 data suggest the economy is on pace to grow 3.5 percent between April and June.

The Commerce Department will probably downwardly revise its first quarter GDP estimate Thursday. Government economists, having over-estimated March trade data, among other indicators, estimated Q1 growth at 0.1 percent. According to forecasts, that number will be revised to reflect contraction of up to 0.5 percent.

Severe winter weather has been largely blamed for the first quarter slowdown.

Tuesday’s PMI release will be one of many that is expected to impact the US dollar. Durable goods orders, the Conference Board’s consumer confidence index and the Richmond and Dallas Fed manufacturing indices will all be closely monitored.

The US dollar ended last week on a high amid signs the housing sector was regaining momentum. The US dollar index, a broad gauge of the greenback’s performance against a basket of currencies, advanced 0.43 percent to 80.43 last week.

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