EMU: PMI Composite FLASH

January 24, 2017 03:00 CST

Consensus Actual Previous
Composite - Level 54.5 54.3 53.9
Manufacturing - Level 54.8 55.1 54.9
Services - Level 53.9 53.6 53.1

The Eurozone private sector economy appears to have got off to a decent, albeit slightly softer than expected, start to 2017. The flash composite output index this month was 54.3, down just 0.1 points versus its final year-end reading but still rather weaker than the market consensus.

The minimal drop in the headline index reflected a similarly minor cooling in services where the flash PMI was also down 0.1 points at 53.6, a 3-month low. By contrast, the recovery in manufacturing continued apace with the flash PMI here gaining 0.2 points to 55.1, a 69-month peak.

Optimistically, growth of aggregate new orders remained very robust at its December rate with both sectors posting solid advances. Backlogs also climbed higher, although the increase here was primarily due to services which saw an eighth successive rise. As a result, employment had another good month and overall payrolls recorded their largest advance since February 2008. Against this background, overall business optimism remained elevated, although only manufacturing noted a rise versus December.

Meanwhile, inflation pressures intensified as input costs increased at their fastest pace since May 2011, in part reflecting euro weakness. This in turn saw aggregate selling prices lifted further and, while the inflation rate eased marginally, December/January saw the sharpest back-to-back increase in prices in more than five years.

Within the core, the news was slightly mixed. Thus while the composite output index in France provisionally rose to a 67-month peak of 53.8, its German equivalent dipped 0.8 points to 54.7, a 4-month low. However, business expectations in Germany hit their highest mark since January 2014. Elsewhere, the rate of growth of business activity (and employment) slowed a little but remained solid.

All in all, the flash January results should be in line with quarterly Eurozone real GDP growth of around the 0.4 percent mark. Importantly too, the buoyancy of new business and employment suggests that the recovery is acquiring some real traction. Underlying inflation may be moving up only slowly but the ECB should not be unhappy with today's report. The chances of any additional monetary easing in 2017 now look that much less.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector output by combining information obtained from surveys of the manufacturing and service sectors of the economy. The flash data are released around ten days ahead of the final report and are typically based upon around 75-85 percent of the full survey sample. 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 flash estimates of the manufacturing and services PMIs. The survey, produced by Markit, uses 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.