Eurozone – PMI survey data stabilizes in August

Eurozone – PMI survey data stabilizes in August

Greece – Snap elections should not jeopardize support package

US – FOMC minutes dampen interest rate expectations

Eurozone – Manufacturing PMI data stabilizes in August, mainly due to strong German data

This week’s August flash manufacturing PMI data for the Eurozone stabilized at 52.4 (growth threshold is at level of 50). The survey data thus managed to beat market expectations which expected a further decline for August. It was mainly Germany, but also the peripheral countries, that managed to compensate for France’s weakness with improved poll data.
In light of the current uncertain financial market environment, we welcome this positive economic signal. In total, the survey data points towards continued slight growth of industry production for the Eurozone in 3Q.
Today’s expected release (at 04:00pm) of a first flash estimate for consumer confidence data for August will be the next important data point for the Eurozone economy. The most recent data leads us to expect slightly weaker consumption growth. Overall, the already published leading indicators for 3Q indicate slightly weaker growth of around 0.2% q/q (after + 0.3% q/q in 2Q).

In China, manufacturing survey data continued to slide to a 6½ year low. This prolonged weakness shows that some concern regarding China’s economy is justified. We will continue to monitor the relevant data (e.g. Eurozone exports to China) in order to be able to properly assess the risks as soon as possible. An analysis based on rolling LTM-data (including May) shows a slight weakening of the growth dynamics of Eurozone exports to China. However, for example, French exports to China continue to accelerate against the general trend. Total Eurozone exports nevertheless show accelerating growth rates.

Greece moving towards early elections

As had already become likely over the last few weeks, Greek Prime Minister Tsipras stepped down yesterday, as a significant number of his own MPs did not follow him through the recent series of votes on the financial support program. Officially, snap elections have not yet been announced. The Greek constitution gives the leaders of the next two parties in size the opportunity to attempt to form a government, although these leaders have the option to renounce their right to do so. In any case, their chance of success would be very low and snap elections are likely to be officially announced next week. Officials have given September 20 as a possible date for the elections. We think it unlikely that agreements reached with the creditors will be reversed after the elections. Firstly, Premier Tsipras will likely again be the head of the next government, as Syriza leads in the most recent polls. Secondly, most of the MPs of the current opposition parties have voted in favor of the measures demanded by creditors. Any change of course after the elections could be difficult to explain. No doubt the upcoming elections are potentially a source of risk, but we do not think that the laboriously achieved agreement with Greece’s creditors is under threat, as recent months have shown that Greece simply has no alternative.

US monetary policy remains without course

The release of the minutes of the most recent FOMC meeting dampened interest rate expectations on the markets, as again all doors were left open for the timing of the first hike. Only two weeks ago, voting FOMC member Lockhart had pointed out that small changes to the recent FOMC statement were intended to indicate that an interest rate hike was coming closer. However, yesterday’s minutes remained vague on the issue.
According to the minutes, some members believed that conditions for higher rates “might not be met soon”, while some members “were confident that they would be met shortly”. The respective size of the two camps was not stated, but seemed to be split quite evenly. In any case, members “generally agreed that additional information on the outlook would be necessary”. One member of the FOMC was already prepared for a hike in July. Overall, there were no indications on the outcome of the next meeting. For now we reiterate our call for the first rate hike in September. One condition is that the situation on capital markets calms down and the other is that upcoming economic indicators confirm the stable growth path of the economy. Looking ahead, the former is the most uncertain, in our view and the risk to our interest rate outlook has increased accordingly. However, before we revise our forecasts, we want to watch market developments further, as we currently see the markets reacting to the risks from China too strongly and believe that they have a fair chance to stabilize.