Strong US service sector ends 2016 on a high - ING

James Smith, Economist, Developed Markets at ING Bank explained that the US service sector continues to motor along at a very respectable rate - That’s according to the latest ISM non-manufacturing index, which at 57.2 (unchanged from November, although above consensus), remains at the highest level since October 2015. 

Key Quotes:

"Ahead of tomorrow’s jobs report, lots of people will be zooming in on the employment component. At first glance, the dip from 58.2 to 53.8 sounds bad. But that’s still above October’s level and the whole index has been pretty volatile over recent months, which makes it hard to extract any kind of trend. We’d also note that, like today’s ADP estimate, the employment index has a very limited correlation with month-to month moves in non-farm payrolls. At face value though, the weaker ADP and ISM employment readings support our sub-consensus, 150k jobs growth forecasts for tomorrow.

December typically is the month where jobs growth is most heavily affected by weather. The previous two December’s were amongst the warmest on record, which led to bumper employment growth (292k and 271k). This time, it looks like temperatures were colder (or at least, closer to average), which is one reason why we see some downside risk to December’s non-farm payrolls data. 

The key number tomorrow though will be wage growth. We’re expecting a strong recovery after last month’s shocking -0.1 MoM fall in average hourly earnings. We think that the YoY rate will push above 3% in the coming months. That’ll be enough for the Fed to deliver 2 hikes this year, with the first in March."