Global Daily – Euro PMIs resilient, but still consistent with only slow growth

by: Aline Schuiling , Nick Kounis , Maritza Cabezas

Eurozone Macro – PMIs signal ongoing modest recovery: The eurozone composite PMI edged higher in August, rising to 53.3, up from 53.2 in July. The slight increase was evenly spread amongst the manufacturing output index (to 54.0 from 53.9) and the services sector activity index (to 53.1 from 52.9). At its current level the index signals an ongoing modest recovery of the eurozone economy, with GDP growing close to the level of Q2 (0.3% qoq). The more forward looking components of the PMI report show that the contraction in the industrial sector in Q2 (production declined by 0.4% qoq that quarter) probably improved into modest growth in Q3. Although the new orders component of the manufacturing PMI declined in both July and in August, the stock of finished goods fell even more, implying that the balance between stocks and orders became more favourable and in line with a pick-up in production. On the other hand, the outlook for the services sector seems to have deteriorated slightly, with the expectations component of the services sector PMI falling in every month during the period May-August. (Aline Schuiling)

 

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Central banks: Recent euro strength and the ECB – The euro has strengthened over recent weeks against both sterling and the dollar. However, the size of these moves are unlikely to have a major impact on the ECB’s monetary policy. This is especially the case when compared to the cut-off data of the ECB’s staff forecasts on 10 May. The broad effective exchange rate (which measures exchange rate changes against the eurozone’s 38 most important trade partners) is actually slightly below the level seen on that date. It is a similar story for other assumptions underlying the projections, with oil prices similar to the level assumed, while government bond yields are lower. Having said all that, it does not mean that the ECB will not need to act further to expand its monetary stimulus. Economic growth is still too moderate to generate underlying inflationary pressures. Indeed, in June, the ECB was projecting an undershoot of its inflation goal over the medium term. This is likely to remain the case when it updates its forecasts at next month’s meeting. So we continue to expect the ECB to extend its QE programme. (Nick Kounis)

US Macro: US financial conditions easing despite higher LIBOR – The new Securities and Exchange Commission rules for money market funds, which will come into effect on 14 October, have resulted in a rise in LIBOR rates. The rules make some alternatives to funding on the interbank market, including commercial paper, less attractive. This is raising short-term borrowing costs. At the same time this move has also resulted in a shift from commercial paper into government debt to pick up additional yield. The question is what will higher short-term borrowing rates mean for financial conditions in the US and for the economy. Financial conditions in the US have been easing lately, after a long period of tightening. A strong US dollar was the main driving force behind this tightening phase but this trend is now over. According to our estimates, the rise in 3m LIBOR rates means slightly tightening financial conditions, but this has been more than offset by a weaker dollar. Meanwhile, we expect longer-term rates to remain low. In addition, we think the Fed will keep policy rates on hold this year. All in all we expect financial conditions in the US to remain stimulative for a while. (Maritza Cabezas)