The Eurozone Purchasing Managers' Index (PMI) 'preliminary' forecasts were released today, May 23rd. These are initial forecasts for this month and are subject to revision.
The euro zone economy gained momentum in May, according to preliminary PMI survey data provided by S&P Global. The European Central Bank also released euro zone wages data, while a rate cut is expected at its next meeting on June 6.
The seasonally adjusted HCOB flash euro area composite PMI production index rose to 52.3 in May from 51.7 in April, above the FactSet consensus of 52 and above the line indicating expansion from contraction (50).
“Business activity, new orders and employment growth accelerated in the middle of the second quarter, and business confidence reached a 27-month high,” S&P said in a report.
The main contributor in the euro area was the services sector, with the HCOB flash euro area services PMI business activity index remaining unchanged from April at 53.3, slightly below the consensus forecast (53.5).
The manufacturing PMI index hit a 15-month high of 47.4, beating expectations of 46.1. However, it remains below the line indicating expansion from contraction. Manufacturing production continued to decline, but the rate of contraction was small.
Will the ECB cut interest rates on June 6th?
The euro zone PMIs for May also contained some insights for the European Central Bank, which meets next month. Both input cost and output price inflation remained above pre-pandemic averages but had slowed from April.
Once again, the services industry was the biggest source of inflationary pressure, but the rate of increase slowed to the lowest level in three years.
“This time, input and output price inflation in the services sector has softened compared to the previous month, which is good news for the European Central Bank,” said Cyrus de la Rubia, chief economist at Hamburg Merkbank.
“This would support a clear interest rate cut from the ECB at its June 6 meeting. However, an improving inflation outlook alone probably will not be enough for the central bank to announce further rate cuts.”
The ECB is all but committed to cutting rates on June 6, and ECB President Christine Lagarde recently said she is “really confident” that euro zone inflation is under control. Other ECB policymakers have been sending strong signals for months. On May 22, Olli Rehn, governor of the Bank of Finland and a member of the ECB's governing council, told AFP that the ECB could start cutting rates before the Federal Reserve.
Eurozone wage increases a warning to the ECB
However, faster wage growth could weigh on future ECB decisions. German wage data released by the Bundesbank on May 22 showed the fastest rise in almost a decade. Eurozone-wide figures released today show that wage growth accelerated in the first quarter. Bargained wages in the euro area rose by 4.7% year-on-year, according to the ECB. This could slow the pace of rate cuts, as wage pressures are key data for ECB officials.
“The direction of nominal wage growth will be key to understanding what the path of future rate cuts will be, not just when the first cut will come (which we now know with some certainty),” said George Curtis, portfolio manager at Twenty4 Asset Management.
