Global Daily – Eurozone accelerates

by: Aline Schuiling , Maritza Cabezas , Arjen van Dijkhuizen

Global-Daily-Insight-25-March-2015.pdf ()
  • Strong eurozone PMIs signals growth acceleration,…
  • …while China’s flash PMI points to ongoing manufacturing slowdown
  • US headline inflation climbs for the first time in four months, core inflation continues to firm

Eurozone PMI highest in almost four years

The eurozone composite PMI (flash estimate) increased to 54.1 in March, up from 53.3 in February. The outcome was above the consensus forecast and took the series to its highest level in almost four years. The rise in the composite index was due to both a higher manufacturing PMI and a higher services PMI. At its current level the composite PMI is consistent with growth in the eurozone accelerating. Indeed, we think that GDP growth will pick up from the 0.3% qoq that was reported in 2014Q4, to a quarterly rate of around 0.4-0.5% in the first half of this year. The weak euro, easing financial conditions due to the ECB’s QE programme, as well as low energy prices are supporting the economy.

 Details of the PMI bode well for the coming quarters

The details of the eurozone’s manufacturing PMI bode well for growth in the coming quarters. The forward looking manufacturing new orders component increased to 52.2 from 51.0, while the ratio of orders to stocks rose to 1.11 in March, the highest level since April 2014.  Also, the PMI report points in the direction of a further gradual improvement in labour market conditions, with the employment component of the composite PMI rising to 51.8 from 51.6.

25 Mar

China flash PMI points to manufacturing slowdown

On Tuesday, HSBC/Markit published its flash manufacturing PMI for March. The index fell to an 11-month low of 49.2, sharply below market expectations (50.5). This was the largest monthly drop since August 2014. The output index showed a slower pace of expansion, while the indices for new (export) orders, employment, prices and stocks all came in below the neutral 50 mark. In our view, the latest PMI data are illustrative for the ongoing slowdown in the manufacturing, retail estate and construction sectors.

 Further measured, targeted stimulus likely

The activity data in Q1-2015 released so far show a weak picture of domestic demand. Going forward, we expect the authorities to continue adding further measured monetary easing and targeted fiscal stimulus to prevent a hard landing. This was also indicated recently at the National People’s Congress, when the authorities put their 2015 growth target at ‘around 7%’, in line with our forecast.

 US core inflation firms

US headline consumer prices rose 0.2% mom in February, up from -0.7% in January. Energy prices rebounded for the first time since July. Core prices rose 0.2% mom, following a similar gain in the previous month. The shelter index, which is the major core component, remained solid, increasing by 0.2%. But most core inflation components rose in February. Over the past year, CPI was flat and the core CPI rose 1.7% from 1.6%, showing an uptick in underlying inflation pressures.

 US inflation on track for a September rate hike

Although FOMC members want to see a broad improvement in economic conditions, the inflation report suggests that inflation is on track for a September rate hike. FOMC members mentioned in the latest statement that they could raise rates when they have seen further improvement in the labour market and are reasonably confident that inflation will move back to its 2% objective over the medium term. Meanwhile, March’s US flash PMI edged up to 55.3 from 55.1 in February. New orders and employment showed solid readings.