The preliminary PMIs (Purchasing Managers Index) are due tomorrow in the Eurozone, and the chances are that they will beat expectations.
A positive surprise should bolster demand for the Euro, especially if we see numbers above the fifty level.
The forecast, though, does not support any PMI above the fifty level. As a reminder, when the PMI exceeds the fifty level, it shows an economic sector that expands, while below the level it shows contraction. Naturally, due to the health crisis and the economic lockdowns, the PMIs in the Eurozone shrank dramatically, to historic lows.
The PMI’s Rebound is Set to Continue
The Manufacturing PMI is expected to improve to 43.8 from 39.4 while the Services PMI to rise to 40.5 from 30.5. While both well below the expansionary threshold, there is scope for some positive surprises, especially on the regional data.
Investors always look at the main Eurozone economies and interpret the regional data together with the PMIs for the entire Eurozone. More precisely, data for Germany and France often moves the markets more than the actual Eurozone PMI.
As the two countries are Europe’s economic engine, improvements there suggests future spillover to other economies. Forward-looking traders react the first to such discrepancies. If we judge by last week’s German ZEW release, the chances are that the German PMIs will show further recovery, perhaps even in expansionary territory.
Europe is closely watched by the rest of the world, especially the United States, as it reopens for business after three-months of lockdowns. In fairness, the lockdowns had several implementation stages – very drastic in some countries (e.g., Italy, Spain), or more relaxed (e.g., Germany).
With summer holidays upon us, the Europeans prepare to spend some of the cash the governments are so keen to give. Holiday-makers already sold packages to sunny Spain and Italian rivieras, and this should help bolster economic diffusion indexes like the PMIs.
The key point here is that, slowly but surely, the world learns to live with the virus. The economies cannot be shut down indefinitely, and precautionary measures define the new normality.
A positive surprise in tomorrow’s PMIs should not be ruled out. Last week the European Central Bank (ECB) revealed that banks took a massive 1.4 trillion via its new TLTRO (Targeted Long-Term Financial Operations) program – that money has to go somewhere.
Where, if not back to the economy?