News & Analysis

  • Eurozone composite PMI: 53.3 vs 53.5 expected
  • Eurozone manufacturing PMI: 44.6 vs 46.0 expected
  • Eurozone services PMI: 55.9 vs 55.5 expected


  • France composite PMI: 51.4 vs 52.0 expected
  • France manufacturing PMI: 46.1 vs 46.0 expected
  • France services PMI: 52.8 vs 54.0 expected


  • Germany composite PMI: 54.3 vs 53.4 expected
  • Germany manufacturing PMI: 42.9 vs 45.0 expected
  • Germany services PMI: 57.8 vs 55.0 expected

Markets have recently adjusted to the idea that the eurozone economy isn’t diverging as much from the US as previously thought; eurozone growth is now seen cooling and expectations of a US recession have been tempered.

This has recently been highlighted by the decline in confidence indices and measures of industrial output within continental Europe. However, one area of divergence remains in the form of monetary policy, with the ECB still seen to be hiking over the summer months while the Fed is more likely than not to take a pause over this period. It is against this backdrop that today’s flash PMIs out of France, Germany, and the eurozone as a whole are viewed. Of specific focus is the services sector, and for two reasons. Firstly, the eurozone’s manufacturing sector has long been in contraction since its boom over the pandemic years, and thus the pace of expansion in services activity is crucial for overall GDP estimates. Secondly, core services inflation is yet to rollover unlike core goods inflation. This was highlighted as recently as yesterday by the ECB Chief Economist, Philip Lane. Therefore, strength in the eurozone service sector, in terms of output, employment, and prices paid are crucial for determining the ECB’s tightening path and its terminal level.

Higher services prices spells bad news for the ECB who are still running up against rising core services CPI 

With the exception of France’s overall level of output, May’s flash PMIs showed resilience within service sector activity, which translated into continued employment and output price growth in services.

This will come as a concern for ECB policymakers and validates the message that has been wholeheartedly relayed by policymakers since the May 5th meeting. That is, although interest rates are close to the terminal level, further tightening of monetary policy is required. While markets have been somewhat hesitant to buy into the guidance, we are now seeing money market pricing align with our view that two further rate hikes are likely. This would bring the deposit rate to a terminal level of 3.75%. With market pricing already stable around this view ahead of today’s PMIs, the data had more of an impact further out on the curve with fewer rate cuts priced in 2024 as a response.

This has led to an uptick in front-end eurozone yields, which has supported the euro against what is a broadly stronger dollar this morning.

The first set of flash PMIs came from France, which has been the powerhouse of service sector activity since February. However, in May, services output declined to a four-month low of 52.8, largely due to softer demand conditions. This was reflected in the first decline in new orders since February, with firms citing a loss of clients, inflation, and lower spending as the reasons for smaller order books. Despite signs that demand pressures are cooling, however, employment continued to expand within the service sector. With the labour market historically tight, this translated into continued increases in input costs, which firms are still passing onto the consumer. While the extent to which this is occurring is difficult to gauge from the PMIs directly, the fact that output prices increased for the first time since January, almost exclusively due to services, won’t be a welcome development for the Governing Council. In terms of growth, with the service sector accounting for 80% of French GDP, the economy likely maintained its momentum from Q1, however, with manufacturing output continuing to contract, the sources of growth are likely to be a lot narrower.

In contrast to France, the German composite PMI managed to beat expectations, up fractionally from last month’s print of 54.2 with a reading of 54.3.

However, the better-than-anticipated headline number masked an alarming divergence between the manufacturing and services sectors of the German economy. The manufacturing PMI fell to a 36-month low, registering a print of just 42.9, indicating a sector that lies deep in contractionary territory. This is in line with the latest factory orders and industrial production data, which in March fell the most since April 2020 and March 2022 respectively. Owing to the softer demand conditions, factory gate prices edged closer to stagnation, suggesting that core goods inflation in the eurozone is likely to continue falling in annualised terms. In comparison, the expansion in service sector activity accelerated for a fourth consecutive month, running at its fastest pace since August 2021. This led to continued employment growth and maintained growth in input costs, albeit at the slowest level in two years. Similar to the French data, prices charged for services continued to ratchet higher on the month, suggesting that core services inflation likely increased from 5.2% YoY in April. Overall, despite signs that the manufacturing sector remains in a difficult patch and will likely contribute disinflationary pressures to the overall core measure, Germany’s PMI data continued to show that the ECB cannot take solace in this dynamic alone. Instead, with growth momentum proving somewhat resilient and core services inflation likely rising, today’s data underscores the need for the ECB to do more.



Simon Harvey, Head of FX Analysis


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