Takeaways following European PMIs

Summary:

• European PMIs kept declining in February except for France
• Fading demand for cars from China could be blamed for downbeat moods among manufacturers
• Euro erases earlier gains as any rate hikes this year have become even more elusive

Profound deterioration in manufacturing

Generally speaking, preliminary PMIs from European economies came in below expectations with the manufacturing index for the Eurozone sliding below 50 points. The data confirmed soured moods among manufacturers making any rate hikes this years even more elusive despite an improvement in service sectors. The euro dipped following a bunch of readings as investors awaiting the ECB’s account to be published later today.

A huge divergence between manufacturing and services in February. Source: Macrobond, XTB Research

Beginning with French indices one may conclude that these ones turned out to be the best. Manufacturing PMI rebounded to 51.4 from 51.2 while services PMI jumped to 49.8 from 47.8 as growing order books counterbalanced the negative impact of “yellow vest” protests. In contrast to France the data from Germany could be classified as particularly gloomy. Manufacturing PMI slumped to 47.6 from 49.7 reaching its 74-month low. Services PMI improved to 55.1 from 53 cushioning the net effect on composite PMI which rose to 52.7 from 52.1. As far as Germany is concerned one may focus on one particular sentence in the Markit’s release. Namely, it said that “Surveyed business continued to report lower orders from the autos sector, whilst also highlighting a fall in demand from Asia (in particular China) linked to ongoing trade tensions and growing competitive pressures within Europe.” Basing on it one may arrive at a conclusion that a US-China trade spat keeps spreading over Europe. Note that the latest threat pertaining to tariffs on cars imported to the US from Europe could also act to the detriment of sentiment across European economies, particularly in Germany.

No inflation pressure in sight

As usual indices for the Eurozone presented the more holistic picture of the economy, being particularly useful in assessing further moves on rates from the European Central Bank. Manufacturing PMI slipped to 49.2 from 50.5 pointing to a contraction in the industry at a European level, whereas services PMI improved to 52.3 from 51.2. As a consequence, composite PMI ticked up to 51.4 from 51. However, one important point needs to be made here, the average of services PMIs from Germany and France suggests that services PMI for the Eurozone should have grown by 2.4 points, instead we got an increase of 1.1 points. It implies that other economies contributed negatively, hence services indices from Italy or Spain could have fallen. Finally on the inflation front we got also less positive information. In the Eurozone, input prices ticked down while output prices rose at a slowest pace in 18 months. All in all, the data seems to be consistent with a scenario where the ECB is more likely to consider (T)LTRO-like programs than pondering over rate hikes later this year. More light could be already shed later today when the ECB will release minutes from its latest meeting.

Technical analysis

The EURUSD has erased its prior gains in response to dismal PMI prints. The pair keeps trading within the bullish channel though. A possible breakdown of this pattern could see the pair visiting the 1.12/1250 area, however, more notable declines seem to be less probable. Source: xStation5