• Home ::
• Fundamental ::
• Economic Indicators ::
• Euroland: French service PMI above 60 – others will follow

• Send
• Print
• Add To
• Rss

This report has been deactivated

Euroland: French service PMI above 60 − others will follow

Mon, Nov 23 2009, 13:38 GMT
by Frank Øland Hansen

Danske Bank A/S

• Today’s PMI data were generally upbeat – with the main exception being a decline in French manufacturing PMI. French service PMI climbed above 60 and we expect that other indicators will follow. Nevertheless the speed of increase is s lowing down and some of the details were more downbeat.
  
• The PMI new orders index declined slightly, but is still signalling that GDP growth will be higher in Q4 than it was in Q3. We project Euroland growth of around 0.6% in Q4. New export orders are still rising. New export orders rose strongly in Germany but declined in France.
  
• The current level of new orders (52.1) is consistent with the ECB being on hold. If new orders were to hit 55.5, this would signal that the ECB should soon deliver a 25bp hike. We do not expect the ECB to embark on its hiking cycle before next summer, but it should announce at the December meeting that it will cut back on long-term auctions.
  
• The PMI employment index is signalling unemployment growth of around 0.1 percentage points per month. Several indicators (including composite PMI) are signalling a labour market stabilisation in early 2010, which is an important precondition for private consumption to recover and the rebound to become more sustainable.
• We expect PMI and other indicators to continue to rise, although the speed is now slowing down. Ifo should nevertheless show above-consensusi ncreases tomorrow. The OECD leading indicator signals that all confidence indicators can continue to rise strongly.

Details
Euroland flash composite PMI increased from 53.0 to 53.7, thus beating consensus but not quite meeting our above-consensus expectation. French composite PMI increased from 58.6 to 59.8. German composite PMI has still not caught up with France, as it only increased from 52.6 to 53.5.

Today’s disappointment was Euroland manufacturing PMI, which only increased slightly from 50.7 to 51.0 pulled down by a decline in French manufacturing PMI. It should however be noted that the decline in French manufacturing PMI from 55.6 to 54.2 comes after several months of surprisingly strong growth. German manufacturing PMI increased steadily from 51.1 to 52.0. The pace of increases in German manufacturing PMI has slowed down, but the direction is robust.

Euroland service PMI was more upbeat as it increased from 52.0 to 53.1. French service PMI came in above 60 as it increased strongly from 57.7 to 60.4. The French service sector is doing surprisingly well. Looking forward we expect French service PMI to slow down soon. German service PMI increased from 50.7 to 51.5.

Euroland composite new orders declined from 53.0 to 52.1, but is nevertheless signalling that growth in Q4 will be around 1.9% q/q annualised, up from 1.5% q/q annualised in Q3. French new orders increased although at a slowing pace and is getting closer to 60!

German new orders lost direction and declined to 51.9. On a positive note, Euroland manufacturing new orders were pretty much unchanged (down from 53.7 to 53.6) and manufacturing export orders continued to climb. The increase in export orders should be no surprise as the PMI export orders have not been able to keep pace with the improvements in actual export data. To put the cart before the horse, Euroland exports indicate that export new orders should have climbed above 55. French manufacturing export orders declined while German export orders rose decently.

Euroland stocks of finished goods increased slightly while the stock of purchased goods increased more strongly. The new order-inventory balance thus came down. It is very likely that the order-inventory balance has peaked and we expect to see further declines in the coming months. The new order-inventory balance is still very high though and we continue to expect that the inventory cycle will add to growth in the coming quarters.

The PMI employment index was almost unchanged – up to 45.5 from 45.4. The employment situation has improved in services, but has declined in both manufacturing and construction. Country wise, the situation worsened in Germany and improved in sharply in France.

Assessment and expectations
Today’s data confirms that the recovery is on track but is also a warning that growth could slow again next year. Manufacturing new orders, the order-inventory balance and German employment expectations declined and French construction sector PMI fell rather sharply.

The PMI new orders index is currently signalling that growth in Q4 (1.9% q/q annualised) will be slightly higher than in Q3 (1.5% q/q annualised). We would not be surprised to see even higher growth in Q4 – not least due to a notable growth contribution from inventories.

France disappointed most observers with just 0.3% q/q growth in Q3. The strong PMI readings point to significantly higher growth in Q4 – although the construction sector is a drag on growth with construction sector new orders (seasonally adjusted) dropping from 45.0 to an even more dismal 39.4. The French car scrappage scheme is still running and car production will add to growth in Q4 – but it might be payback time in Q1.

The German flash PMI gave a strong reading and thus hard and soft data are allied in pointing towards strong German growth in Q4 (well above trend). The only caveat is that we have seen a slump in German car sales following the termination of the German car scrappage scheme. While this is not affecting German car production, it will weigh on Q4 production.

As we move into 2010, sustained growth will increasingly depend on consumers coming back. The outlook for the labour market is somewhat comforting in this respect. The PMI employment index is currently signalling unemployment growth of around 0.1 percentage point per month and several indicators including the composite PMI index are signalling an imminent labour market stabilisation.

The current level of new orders is consistent with the ECB being on hold. If new orders were to hit 55.5, this would be a strong signal that the ECB should soon deliver a 25bp hike. In late 2005, the ECB delivered a first hike when new orders had just hit 53.9 – although it did move to 55.6 the month after. We do not expect the ECB to embark on its hiking cycle before next summer, but it should announce at the December meeting that it will cut back on long-term auctions.

The PMI new orders is signalling that the two-year government yield spread to the refinancing rate is too low. At the current juncture of the cycle, the yield curve should be steeper. We anticipate that the confidence indicators will show further gains in the coming months, but the pace of improvement is slowing down. The OECD leading indicator signals that confidence indicators can continue to rise strongly in the coming months. We expect industrial orders and production to continue to increase in the coming months.

• Download full report with carths

Published on  Mon, Nov 23 2009, 13:47 GMT