EMU: PMI Composite FLASH

Wed May 23 03:00:00 CDT 2018

Consensus Actual Previous
Composite - Level 55.1 54.1 55.2
Manufacturing - Level 56.0 55.5 56.0
Services - Level 54.6 53.9 55.0

The Eurozone economy lost further momentum this month if the latest PMI survey is anything to go by. At 54.1, the flash composite output index was down a full point versus its final April mark, comfortably short market expectations and at its weakest level in eighteen months.

Ominously, the surprisingly sharp deceleration was broad-based and roughly evenly split between manufacturing and services. Hence, the flash manufacturing PMI fell from a final 54.7 in April to 53.9, a 15-month trough, and within which the output sub-index was off 1.7 points at 54.5. Its services counterpart declined 0.8 points to 53.9, its worst print in sixteen months.

Worryingly, weakness was particularly apparent in new orders (19-month low) where growth slowed for a fifth successive month. More optimistically, job creation was again robust, although the least marked in nine months, and backlogs similarly continued to expand, albeit at the slowest rate since January 2017. Business confidence in the year ahead worsened but held above its long-run average.

Inflation developments were mixed with the input cost rate touching a 3-month high but output prices recording their weakest rate since last September. Vendor delivery times remained close to historic highs - suggesting sustained pressure on capacity - but also shrank to the shortest since September 2017.

Amongst the core countries, the French composite output index fell a hefty 2.4 points versus its final April reading to 54.5, a 16-month low, while Germany saw a 1.5 point drop to 53.1, its worst print in twenty months. However, elsewhere across the region, the news was more robust and growth was the strongest in three months.

In sum, today's results will not sit well with the ECB. Taken at face value they suggest that the slowdown in Eurozone economic activity seen in the first quarter continued in the current period while weakening orders growth hardly bodes well for any improvement next quarter. Potentially significantly, the survey found frequent reports of business being disrupted by a higher than usual number of public holidays but the underlying picture still looks soft. Hopes that the first quarter cooling in GDP would prove short-lived are looking increasingly optimistic and the chances of an extension to the ECB's QE programme beyond September that much more likely.

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.