EMU: PMI Composite FLASH

Tue Oct 24 03:00:00 CDT 2017

Consensus Actual Previous
Composite - Level 56.5 55.9 56.7
Manufacturing - Level 57.8 58.6 58.2
Services - Level 55.6 54.9 55.6

October looks to have been a slightly disappointing month for the Eurozone economy. The flash composite output index was 55.9, a 0.8 point fall versus its final September outturn and quite well short of market expectations. That said, it remains more than comfortably above the 50 growth threshold and, indeed, at a high enough level to suggest that economic activity continued to expand at a reasonably healthy clip.

The headline decline was mainly attributable to a slowdown in services where the flash PMI dropped 0.9 points to 54.9. By contrast, its manufacturing counterpart actually rose 0.5 points to 58.6. This was well above the market consensus and a new post-Great Recession high.

Aggregate new orders growth was unchanged and backlogs recorded another sizeable increase. Indeed, the rise in the latter came despite the largest advance in employment in more than a decade. Business confidence was down on September but companies were still bullish about the outlook. Inflation news was positive. Input costs saw their steepest increase in six months and, against the backdrop of strengthening domestic demand, output prices their heftiest gain since June.

The core countries had a mixed time with the flash composite output index in France rising 0.4 points to a very respectable 57.5 but the German measure shedding almost a full point to 56.9. Outside of the big two states, the rate of expansion was solid, but eased to the weakest for a year on the back of a slower services sector.

Today's results still suggest that overall Eurozone private sector activity is growing at a slightly faster rate than in September and, of course, the monthly figures can be volatile. Nonetheless, they also warn that fourth quarter GDP growth may slip a little versus the third quarter (preliminary flash data due its monetary policy on Thursday. Even so, the ECB should not be displeased with the report as a whole.

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.