EMU: PMI Composite FLASH

Fri Sep 22 03:00:00 CDT 2017

Consensus Actual Previous
Composite - Level 55.6 56.7 55.8
Manufacturing - Level 57.2 58.2 57.4
Services - Level 54.7 55.6 54.9

September's flash PMI report comfortably beat market expectations. At 56.7, the key composite output index was up a full point from its final August post and at its highest level in four months.

The acceleration in overall business activity was driven by faster growth in both the manufacturing and service sectors alike. Hence, the flash PMI for the former rose 0.8 points to 58.2, a 79-month peak, while the services measure climbed 0.9 points to 55.6, its best reading since May.

Manufacturing output (58.2) expanded at its fastest rate in seventy-nine months and, at least as importantly, growth of aggregate new orders was the strongest since April 2011. Pressure on capacity was reflected in a record increase in employment in manufacturing and the rise in headcount in services was close to the highs seen earlier in the year. Even so, aggregate backlogs recorded their sharpest gain since February 2011 and vendor delivery times were the slowest in more than six years. Business confidence hit a 3-month peak in both sectors.

The buoyancy of the real economy added to inflationary pressures and both input cost and output price inflation climbed to their highest mark since April.

Regionally, there were marked improvements in both core members. The flash composite output index was up 2 points at 57.2 in France and also gained 2 points to 57.8 in Germany. Both outturns constituted multi-year highs. However, elsewhere growth of business activity eased to a six-month low, although this was only just shy of the average seen in the year to date.

Nonetheless, taken at face value, the ECB should be more than a little pleased with this report. Not only is the economic recovery apparently progressing at a respectable clip, but growth this quarter could exceed the 0.6 percent quarterly rate achieved in April-June. Moreover, inflationary signals are also moving in the right direction, albeit still rather too slowly for comfort. Speculation about a recalibration of the central bank's monetary stance on October 26th has just been given another significant boost.

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.