EMU: PMI Composite FLASH

Thu Nov 23 03:00:00 CST 2017

Consensus Actual Previous
Composite - Level 56.0 57.5 55.9
Manufacturing - Level 58.4 60.0 58.6
Services - Level 55.0 56.2 54.9

The Eurozone economic recovery seems to have acquired additional momentum this month. The flash composite output index weighed in at 57.5, a 1.5 point increase versus its final October print and its best reading in fully seventy-nine months. It was also comfortably stronger than market expectations.

The headline bounce reflected healthy improvements in activity rates in both manufacturing and services. The former's flash PMI was up 1.5 points from its final October mark at 60.0, its strongest outturn since April 2000 and the second highest on record. Services provisionally advanced 1.2 points to 56.2, their most robust performance in half a year.

Growth of aggregate new orders was again very sharp, especially in manufacturing, and backlogs saw their largest gain since July 2006 despite headcount rising at its fastest rate in seventeen years. Somewhat surprisingly, business optimism slipped in both sectors but remained historically elevated.

Meantime, price pressures continued to build. Vendor performance deteriorated again and cost inflation climbed to a six-and-a-half-year peak. In turn, this prompted a pick-up in output price inflation to its highest rate since 2011.

Within a notably robust core group, the flash French composite output index (60.1) recorded its highest mark in seventy-eight months while its German counterpart (57.6) recovered most of the ground lost in October. Elsewhere, growth of business activity improved on October's 9-month low but still looks to be on course for its weakest quarter so far this year.

Current PMI readings point to a quarterly rate of Eurozone economic growth of about 0.8 percent. If correct, this would equal the best performance by the region since the first quarter of 2011. This would certainly please the ECB but much more important will be what happens to prices. To this end, if this report is anything to go by, capacity pressures would now seem to be at a level that should make an increase in underlying inflation closer than many might think.

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.