Daily Market Update: Flash PMIs highlight slippage in euro zone growth momentum
Published 24/05/2016 | 10:14
Yesterday’s flash PMI figures for May out of the euro zone were on the weak side of market expectations.
The composite index ticked down to 52.9, against the forecast for a slight rise to 53.2 (from 53 in April). While such levels of the composite PMI are still consistent with modest positive quarterly GDP growth, the May reading is the lowest composite PMI print since January 2015. Moreover, the figures are running below the Q1 average (of 53.2) as well as last year’s average of 53.8, thus highlighting a slippage in recovery momentum in the zone. The weakness largely came from the manufacturing sector where the PMI deteriorated to 51.5 in May from 51.7 in April - undershooting consensus expectations of a rise to 51.9. The recent broad weakness in manufacturing activity in the zone is likely to be associated with sluggish global demand, higher oil prices and a stronger euro. The services sector continues to hold up better than manufacturing, but the PMI here also remained soft, at an unchanged 53.1, in spite of stronger regional numbers in France and Germany. Overall, the ECB will have been recently encouraged by stronger than expected Q1 GDP growth which printed at 0.5%q/q. However, the continued weakness in the more timely business survey data highlights that the risks around the outlook continue to lie to the downside, in turn affirming the need for the ECB to retain its bias to ease policy further if needed.
We also had some preliminary PMI data from the States yesterday, in the form of the Markit Manufacturing PMI. This is a relatively young survey / series and has yet to establish anywhere near the importance to investors of its long-running competitor – the ISM survey. Plus, as regular readers will know, manufacturing makes up a small share of US output and employment, meaning greater weight should always be placed on developments in the dominant services sector. Nevertheless, it does have the advantage of being released (in flash form at least) about a week earlier than the ISM which is why it is certainly deserving of a look. Yesterday’s figures printed at 50.5 for May, showing that US manufacturing activity continues to expand. However, this was down from April’s 50.8 and weaker than the 51 reading that had been expected. Similar to the pattern of the euro zone equivalent, these latest results are pointing to a factory sector which is struggling in the face of sluggish global activity as well as the effects of past dollar appreciation (though the greenback’s retreat from a 13-year high in January should help dampen the currency headwind facing US manufacturers). Away from the data, we’ve had yet more hawkish commentary from Fed officials as the Fed’s concerted attempt to get the market more in tune with its view on the interest rate outlook continues to ramp up. Philadelphia Fed President Mr Harker (non-voter) said that he could see two to three rate hikes in 2016 and that prices will return towards the central bank’s inflation target over the medium term. His counterpart at the St. Louis Fed James Bullard noted that U.S. interest rates being kept too low for too long could cause financial instability in future and stronger market expectations for a rate rise are "probably good", adding that the June outcome “does depend on the data and it's certainly not 100 percent, but it's not zero either. Some probability in between is the right thing to think at this point."
In terms of the currency markets, the main move of note has been a modest decline in the euro’s value. The single currency has fallen by about 0.5% against both the dollar and sterling to open at $1.1180 and 76.9p respectively. The dollar looks to be benefiting from the Fed’s hawkish tones while sterling looks to have gotten a lift from some of the latest referendum polling which looks to be pointing to some further modest gains for the Remain camp.Sponsored by: