Overview:
Flash PMI surprised to the upside with the composite PMI rising to 52.7 in February from 51.8. The rebound was driven by a stronger service PMI whereas manufacturing PMI fell in line with expectations. The number confirms that the very sharp drop in service PMI we saw last month was partly a sentiment effect as the survey was conducted during the time of the financial turmoil that led the Fed to cut 75bp - see Research Global: A stalling service sector . The level for service PMI is still quite low though confirming that the weakness is also related to weak consumer spending. The composite PMI points to GDP growth of 1.25%. This number means that the ECB will continue to be sidelined for now - especially given the bad news we have received on the inflation front with higher energy and food prices and the wage deals in Germany coming in high.
Details:
The service PMI rose from 50.6 to 52.3. Manufacturing PMI fell, in line with expectations, from 52.8 to 52.3. As the charts below show, the service PMI is still at a relatively much weaker level than manufacturing PMI, which has been going mostly sideways in the last few months. However, interestingly, the service sector has very often been the most leading indicator and this points to further weakness in manufacturing PMI in the coming months. The weak industrial surveys in the US also confirm that the industrial sector in general is weakening at the moment and, as in 2001, we think Euroland will follow gradually with some lag.
Outlook and assessment:
We expect composite PMI to grind lower in the coming months but it will probably take some time before it reaches levels where the ECB will act on it and cut rates. Even though the composite PMI is in the "cut zone" already, it will take more weakness for the ECB to cut because of the high inflation risks. Hence we do not see the ECB cutting before June. The market is already pricing in the cuts we see coming so we are fairly neutral on the euro bond market here. Two factors will be important: How weak will growth be (both in the US and Euroland) and how much will inflation and wages continue to disappoint?
