PMI surveys dominate as we await big tech earnings

• UK data fails to dampen GBP rebound, as unemployment falls
• Eurozone PMI surveys weaken, raising expectations of a ECB rate pause
• Big tech dominates US earnings today, with Microsoft and Alphabet set to drive market sentiment

European markets are taking a negative tone once again today, with the optimism seen yesterday proving short-lived. The FTSE 100 has been the big underperformer in Europe, with a rising pound helping to drive valuations for overseas firms lower. From a UK perspective, the latest jobs report saw a sharp jump in claimants, although a downward revision to the August figure and lower unemployment rate helped ease concerns of an economic deterioration. The pound has held up well compared with their eurozone neighbours, with the latest PMI report for October portraying a relatively stable rate of decline despite claims that higher rates will see the contraction gather pace. A significant improvement to the UK manufacturing PMI represented a second consecutive rise, bringing confidence that the sector is moving in the right direction. The key services sector remains in a moderate state of contraction (49.2), although this will likely be seen by the BoE as a sweet spot as they seek to take the heat out of the economy.

The eurozone economy took a step backwards in October, with declines across both manufacturing and services sectors bringing heightened expectations of a rate pause from the ECB this week. A slump in the German services sector (48 from 50.3) helped drive the wider eurozone services sector figure into the lowest level since the first quarter of 2021. With the latest inflation figures moving sharply lower, and the eurozone economy contracting at a faster clip, the already slim chance of another rate hike from the ECB on Thursday just became less likely.

Looking ahead, the US PMI survey look likely to play second fiddle to a raft of earnings headed up by tech giants Microsoft and Alphabet. Much of the upside seen for US markets this year has been driven by a select few companies, with Microsoft (43%) and Alphabet (57%) both key to that bullish 2023 S&P 500 trajectory. That optimism centers around the prospective revenues that the AI revolution could bring, with Microsoft specifically fast tracking their involvement thanks to their OpenAI investment. The ability to justify these lofty valuations will be key, with accelerated growth in AI revenues needed to signal that investors are correct in presuming that this could become a major revenue source going forward.