Why do we look at the PMI?
Today's news headlines:
- ‘UK’s Johnson confronts moment of truth for Brexit strategy’. Boris Johnson is preparing to present his blueprint for an amended Brexit deal to the European Union in the coming days. The future of his political rule hinges on the reaction to his political plan from both his Conservative Party and Brexit officials in Brussels. If unsuccessful, Johnson will face the choice of forcing a delay beyond October 31st or trying to withdraw Britain from the EU in a chaotic no-deal scenario. (Bloomberg)
- ‘US House impeachment probe intensifies as Trump rages about inquiry’. Last week’s impeachment inquiry against Donald Trump raised concerns that the US President had tried to leverage a significant sum of US aid to Ukraine in exchange for them investigating former Vice President Joe Biden. Yesterday, President Trump raged as news reports suggested he had used additional diplomatic channels to go after his adversaries. Trump took to Twitter to suggest that the Democrat leading the inquiry, Adam Schiff, should be arrested for ‘treason’. (Reuters)
There was some good Eurozone news out recently; the unemployment rate is moving lower throughout the bloc in a sign that the average household’s circumstances are improving even if the global growth backdrop is weakening. The difficulty is that business confidence and forward-looking survey data all point to a serious decline. There are so many releases for the Eurozone that it may be challenging to follow the trend but let’s try to illustrate the broad strokes.
Purchasing Managers’ Index (PMI) survey data—which asks purchasing managers within services and manufacturing sectors about their view of topics like order formation, business conditions, and future expectations—is a very timely measure because it is released only days after being compiled. A score of 50 suggests a neutral, no-change business climate while lower suggests deterioration. Fortunately, Markit, which conducts the survey, also produce bloc-wide aggregate figures for both the manufacturing and service sectors.
Over the past year, manufacturing has declined while services has remained buoyant due to a reasonably well-off consumer. We’ve written extensively about the China/Germany/trade war connection, which has really taken a toll on manufacturing in Germany, the EU’s largest economy, but it is becoming clear that this weakness is starting to bleed into the largest services sector too. The recent decline in the Services PMI data has been accompanied by a fall in the broader EU Business Confidence survey which suggests more is at play here than just the manufacturing slowdown.
Bottom line: Todays EU Manufacturing PMI number has just come out slightly better than expected at 45.7, but it’s also the worst reading in this sector since Nov 2012. It’s also worth noting the German specific number was 41.7, the lowest reading since 2009. We will see the next data release for the EU Services PMI series on Thursday.
The pair traded in a 70-pip range yesterday, with some good two-way price action for markets to act on, but ended the day relatively unchanged. The Bloomberg trade-weighted US Dollar Index remains around two-year highs, but the pair is holding above the 50-day moving average. A break below this level could see the pair target the 1.20 region once more.
The Euro weakened against the Pound in yesterday’s session as markets reacted to a poor reading of German inflation that registered the weakest level in almost three years. Today’s moves will likely be driven by a plethora of Eurozone Manufacturing PMIs and reports that Boris Johnson is set to propose a resolution to the Irish border backstop issue.
The combination of a stronger Dollar and weaker Euro led to the pair moving below its lowest level in over two years. Poor Eurozone data suggests that ECB policy will remain accommodative in the coming months while today’s US manufacturing PMI figure is expected to indicate the sector returning to expansion.
All content is written by the Global Reach Trading Desk. The opinions expressed are not the view of Global Reach Group and are not intended as investment advice.