PMIs paint somewhat rosier outlook for euro again

Summary:

• Manufacturing PMIs rebound in July suggesting the growth slowdown is unlikely to come abruptly
• Readings for services weaken, composite PMIs decrease as well except for Germany
• Euro bounces off its short-term support but keeps moving below 1.1700

Manufacturing PMIs saw a bounce in July following the latest losing streak nevertheless moods in services deteriorated to some extent and as a result composite releases slipped except for Germany. The euro was little changed immediately after the release. From a technical angle the common currency might pull back toward its short-term support.

Services PMIs decreased while manufacturing prints improved in July according to Markit. Source: Macrobond, XTB Research

At the beginning let’s cut through numbers, and then draw conclusions being important for both European economic growth and the euro itself.

Services:

• France 55.3 (55.7 expected) vs. 55.9 previously
• Germany 54.4 (54.5) vs. 54.5
• Eurozone 54.4 (55.1) vs. 55.2

Manufacturing:

• France 53.1 (52.5 expected) vs. 52.5 previously
• Germany 57.3 (55.5) vs. 55.9
• Eurozone 55.1 (54.7) vs. 54.9

Composite:

• France 54.5 (54.9 expected) vs. 55 previously
• Germany 55.2 (54.8) vs. 54.8
• Eurozone 54.3 (54.8) vs. 54.9

First and foremost, all services PMIs fell short of expectations by a larger or smaller margin. Simultaneously, readings for manufacturing turned out to be above median estimates in each region. However, it should not be particularly worrisome as we had the much livelier improvement in services compared to manufacturing over the past months. It needs to be said that the manufacturing sector appears to be more important as it accounts for a greater part of economic growth than the services sector. Thus, the improvement reported by managers hired in industrial companies ought to be welcome in particular. Anyway, even as we were offered decent rises in manufacturing, this is especially true when it comes to the German economy, one cannot say the same about composite PMIs. Basically, only Germany witnessed a rise in this indicator while indices for France and importantly Eurozone declined compared to June. It might be a sign that despite the uptick in manufacturing the overall growth outlook for the Eurozone’s economy has not evolved too much.

To sum up, an economic slowdown in the second quarter has been already taken for granted, but the beginning of the third quarter did not bring any relevant turnaround. Having said that, given risks surrounding trade wars we may conclude that lack of a significant fall in Eurozone composite PMI is a positive signal. Anyway, the details of the release for Eurozone unveiled that companies reported rising prices for raw materials, the reduced inflow of new orders, delivery delays and shortages implying that tariffs will not become invisible. This is the major risk for the European economy but as long as domestic demand remains robust it could cushion the growth slowdown. All of the above-mentioned prints will be thoroughly scrutinized by the European Central Bank which meets this Thursday, hence do expect questions with regard to a relationship between duties, PMIs and economic growth.

July’s PMIs do not seem to point to an abrupt economy growth slowdown. Furthermore, given that average selling prices for goods and services increased in July (based on the Markit’s survey) one may discern some signs of inflationary pressures. Technically the euro has come back into the descending channel. After testing 1.1655 the pair came back to the upper bound of the channel. As for now one may anticipate the pair could re-test 1.1655, and if this level is not broken, one may count on another attempt to leave the channel throughout its upper limit. Source: xStation5