EMU: PMI Composite

Thu May 04 02:55:00 CDT 2017

Consensus Actual Previous
Composite - Level 56.7 56.8 56.4
Services - Level 56.2 56.4 56.0

Eurozone business activity was just fractionally stronger than originally reported in April if the final PMI data are anything to go by. At 56.8, the composite output index was 0.1 points above its flash estimate, 0.4 points higher than its final March reading and indicative of the best period for economic growth in six years.

The final service sector PMI weighed at 56.4, a 0.2 point gain versus its preliminary reading and a 0.4 point increase versus the final March outturn. This constituted its highest level since April 2011. Strong growth of new business was complemented by a further rise in backlogs despite one of the largest advances in sector headcount in the last nine years. Input cost inflation eased to a 3-month low but was also amongst the highest recorded in the last five years and part of this was passed on in the form of higher service sector charges. The latter have now been rising for six consecutive months.

Regionally, in terms of composite output, the best performing country was Ireland (58.7) ahead of Spain (57.3) and Italy (56.8) which saw a 117-month high. Germany (56.7) and France (56.6) were only just behind. Interestingly, the spread between the largest three countries was the joint narrowest in the survey's history.

The final PMI data bode well for a pickup in Eurozone real GDP growth this quarter. Moreover, the apparent improved convergence amongst the larger member states increases the likelihood of a sustained upswing over the remainder of the year and into 2018. With output prices also accelerating, albeit only quite slowly, financial markets may soon be contemplating not just a modification of the ECB's forward guidance, but also a possible tapering of the QE programme.

The Composite Purchasing Managers' Index (PMI) provides an estimate of private sector output for the preceding month by combining information obtained from surveys of the manufacturing and service sectors of the economy. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) output versus the previous month and the closer to 100 (zero) the faster is output growing (contracting). The report also contains the final estimate of the services PMI. The data are provided by Markit using a representative sample of around 5,000 manufacturing and services companies, the former including Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece and the latter Germany, France, Italy, Spain and the Republic of Ireland.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.