The Eurozone manufacturing PMI ended 2016 at 54.9, unrevised from its flash estimate but a tidy 1.2 points firmer than in November and the highest level since April 2011.
The headline improvement was largely attributable to solid gains in both output and new orders where the rates of expansion were either at, or close to, the fastest since early 2011. Within the latter, the rise reflected growth of both domestic and overseas demand with foreign orders benefitting from a weaker euro. Indeed, the buoyancy of aggregate demand saw some intensification of capacity pressures with backlog accumulation hitting a 68-month record and average vendor lead times lengthening to the greatest extend since June 2011. Against this backdrop, job creation across the region was solid and employment was up in almost every member state.
Input costs climbed sharply and inflation here was the most marked in five-and-a-half years. In turn, factory gate inflation accelerated to its quickest pace since July 2011.
Regionally, the best performer was the Netherlands (57.3) ahead of Austria (56.3) and Germany (55.6). Spain (55.3) also had a good period but multi-month highs in both France (53.5) and Italy (53.2) were still well short of the Eurozone average. Greece (49.3) hit a 4-month peak but was still in negative growth territory.
Today's data should be in line with Eurozone manufacturing output expanding at annual rate of around 4 percent at the end of last year. Strong gains in new business and backlogs suggest another good performance at the start of 2017 and a healthy increase in the sector's payroll is probably indicative of a decent level of business confidence. Pressures on capacity are also clearly on the up so it may well be that PPI inflation finally establishes itself comfortably above zero during the course of this year. That said, much may depend upon the performance of the euro and the ECB will no doubt be hoping that last quarter's losses against the dollar will not be reversed any time soon.
The Manufacturing Purchasing Managers' Index (PMI) provides an estimate of manufacturing business activity for the preceding month by using information obtained from a representative sector survey incorporating around 3,000 companies. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). Released by Markit, national data are included for Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece. These countries together account for an estimated 89 percent of Eurozone manufacturing activity.
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 ISM manufacturing index in the U.S. and the Markit PMIs elsewhere, 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.
The Markit PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.