Financial markets are awaiting the “flash” forecast for the Eurozone Purchasing Managers Index (PMI) on May 23rd. These are initial forecasts for this month, subject to revision, and are expected to show the region's economy is still expanding.
In the eurozone, after a strong start to the second quarter, S&P Global's HCOB Flash Eurozone PMI released on Thursday will provide the latest snapshot of the economy's health. According to Daily FX, the consensus forecast for the general index in May is 52 points, which is above the line indicating expansion from contraction and above April's revised value of 51.7.
Expectations are rising for the Services PMI index (53.4), which expanded in May and rose slightly from April's index of 53.3. Meanwhile, the manufacturing index is expected to show a continued contraction in activity.
Analysts at investment bank Goldman Sachs are more cautious: “We expect euro area flash PMIs to weaken slightly going forward but remain in expansionary territory. Specifically, we expect the composite flash PMI to weaken 0.2 percentage points to 51.5, below the consensus forecast of 52.0, weighed down by slowdowns in France and the services sector,” they said in a May 17 note.
Will the ECB cut interest rates in June? Or wait?
The European Central Bank (ECB) monetary policy meeting will be held on June 6th, and economists and some ECB officials expect the first interest rate cut to be made then. But some analysts are becoming more cautious about the possibility of rate cuts after June.
Commenting on the April PMI data, Silas de la Rubia, chief economist at Hamburg Commercial Bank, said: “Service providers have now expanded their activity for the third month in a row, continuing the dynamism seen in the second half of last year. “We have put an end to the lack of this.” Year. ”
“Productivity has become a critical challenge for the services industry and the ECB. Since the beginning of 2021, service providers have consistently expanded their staff. […] This trend suggests that companies facing employee turnover may need to hire multiple people to maintain the same level of output, indicating a decline in productivity. I am.
“Meanwhile, the PMI index for service sector operating costs, which mainly comprises unit labor costs, has continued to rise at a rapid pace over the past 12 months, following a sharp rise in 2022. “We are aware of this and are likely to proceed cautiously regarding the extent of interest rate cuts.”
Will inflation in the euro area return?
The April PMI survey also showed that inflationary pressures are increasing across the euro area, due to increases in both input and production costs. Investment bank Nomura said this factor is “cautious” as “core services inflation remains higher than expected” and underlines a more gradual rate-cutting cycle by the ECB. .
Nomura changed its view in its latest report on May 17th, rescinding its forecast for a 25 basis point (bp) rate cut in July this year.
“On the back of solid activity data, resilient demand, a reassuring labor market, stronger-than-expected wage growth, and still-sticky services inflation, the ECB will need more than initially expected to maintain some financial standards. We think they'll want to see a gradual rate cut,'' said Nomura economist Andrzej Szczepaniak.
“We expect 25bp. [cuts] It will be held in June, September and December this year and March, June and September next year,” he said.
Why is the PMI index important for investors?
The PMI index is an important indicator for investors to understand market sentiment and understand the future direction of the stock market. These are what economists call “leading indicators.”
It has the advantage of being based on real data collected from purchasing professionals from hundreds of companies. See orders, inventories, prices, employment, and more to provide a concrete indication of the health of the sector.
