EMU: PMI Composite FLASH

Mon Apr 23 03:00:00 CDT 2018

Consensus Actual Previous
Composite - Level 54.9 55.2 55.3
Manufacturing - Level 56.6 56.0 56.6
Services - Level 54.8 55.0 55.0

April's flash PMIs failed to find any pick-up in overall economic momentum at the start of the current quarter. In particular, the flash composite output was unchanged at its final March print of 55.2, signalling the joint-weakest performance since the start of 2017. That said, the latest reading was on the firm side of market expectations and, historically, still strong.

Nonetheless, the stable headline masked another deterioration in manufacturing where the flash PMI dropped a further 0.6 points from its final March outturn to 56.0, a 14-month trough. Services (55.0 after 54.9) were essentially flat.

Growth of aggregate new business fell to a 15-month low reflecting smaller gains in both sectors. However, backlogs continued to gain ground and employment recorded a stronger advance as services posted its fastest rate of job creation in a decade. Even so, overall inflation pressures were a little less marked. The input cost rate dropped to its lowest level since last September while another solid rise in output prices was not enough to prevent a decline here too.

Within the core, the French composite output index was provisionally put at 56.9, a 0.6 point improvement versus March, while its German counterpart was just 0.2 points firmer at 55.3. Elsewhere, growth slowed to an 18-month low, with both manufacturing and services recording weaker rates of expansion.

The April data suggest that if the bad weather in March did impact economic activity, then it only compounded an underlying slowdown. The flat composite output index, lower business confidence and weakening orders growth all suggest that the Eurozone economy has genuinely cooled since the turn of the year. That is not to say that growth has dried up but the 0.7 percent and 0.6 percent quarterly GDP rates seen in the third and fourth quarters of 2017 respectively look unlikely to be equalled this period. Some deceleration was probably inevitable but the risk is that any further loss of momentum puts a cap on inflation before its gets close to the ECB's near-2 percent target. The central bank must be a little concerned.

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.