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Further Improvement in Eurozone PMI Data

The Purchasing Managers Index (PMI) data for June 2020 was closely watched for both traders and economists today. It was expected to show further improvement in economic activity. It did not disappoint.

However, looking at details, one should not be fooled by the rebound. Even if and when the PMIs get back into the expansionary territory (above the 50 level), it does not mean that the economy experienced a V-shape recovery. It only shows growth but from lower levels. For a better understanding, think of the data in terms of percentages – a 10% drop followed by a 10% rise still shows a decline.

Positives and Negatives of Today’s Eurozone PMIs

The flash data released today refers to the European PMI Composite, the Services PMI Activity Index, the Manufacturing PMI Output Index, and the overall manufacturing and services PMIs – they all came at 4-months high. While viewed as a positive sign, a trader’s job is to look into details and handpick relevant pieces of information that, coupled with other economic releases, help to form the bigger picture.

The market took it optimistically. Euro rose across the board, with the EURUSD pair reaching 1.13 after closing below 1.12 last Friday, and EURGBP trading steady above 0.90.

Regarding Eurozone’s economic output, the composite (i.e., services and manufacturing sectors combined) shows a soft decline in activity, with services continuing to fall, albeit at a slower pace. While the output for the manufacturing sector remained relatively stable, new orders fell for the twenty-first successive month, pointing to contraction in new business.

Work outstanding declined, too – both for European services and manufacturing services. Particularly worrying is the steep decline in backlogs in the manufacturing sector, reflecting that the outstanding business is down sharply.

Job cuts remain elevated, too, for both sectors. As for the input and output prices, the former rose slightly, while the latter fell (for the manufacturing sector, selling prices are down for the twelfth month running).

All in all, there is hardly something to celebrate. Employment is weak, prices continue to fall, and output mostly declines. Translated in the central bank’s hawkish/dovish view, the continuing fall in prices puts pressure on inflation and, more importantly, inflation expectations. For a central bank like the ECB that has an inflation-targeting framework, that is the most important thing to monitor and interpret.

So far, the PMI’s continue to paint a slow economic recovery, and the ECB is likely to keep its dovish message.

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