Eurozone PMI Preview: Looking ahead to Lagarde

• EMU manufacturing PMI in contraction for five months.
• Services and Composite PMI’s have improved slightly this year.
• Euro could weaken from ECB policy prospect.

Purchasing managers’ indexes from Markit Economics for July will be released on Wednesday July 24^th at 8:00 GMT, 4:00 EDT.

Forecast

The composite PMI is expected to decline to 52.1 in July from 52.2 in June. The PMI for manufacturing is predicted to be unchanged at 47.6. The services score is projected to drop to 53.3 from 53.6.

Eurozone slowdown

Europe’s weak economic growth has been supported by the service sector this year. Manufacturing has been declining since February with the index reading below the 50 division between expansion and contraction.

FXStreet

That tenuous situation will deepen when the purchasing managers’ indexes from London based Markit Economics show no improvement in sentiment in July for Europe’s factories and a drop in in the wider service and composite measures.

With consumer and business confidence falling and German business surveys weakening it is an open question how long services can keep the EMU economy from recession.

Under the Tory choice of Boris Johnson as the next UK Prime Minister Brexit is about to resume center stage with all its negative potential for economic growth and political stability. 

FXStreet

In Italy the restive government of Matteo Salvini and Luigi Di Maio is in a cold war with the EU Commission and leaning towards new elections which could result in the unified rule of Mr. Salvini, the most popular politician in Italy. Europe’s problems come against a background of slowing global economic growth and the unsolved US-Chinese trade war.  

Inflation was a marginally better than expected in June at 1.3% but well below the 2% target. Unemployment has continued to trend lower and wage gains are at decade highs, both in accord with other industrial nations.

ECB

Mario Draghi, the President of the central bank promised recently that the ECB could cut rates if necessary to support the Eurozone economy. But with the ECB main refinance rate already at zero any rate cut would likely have scarce impact. A return to quantitative easing bond purchases would drive the zones sovereign rates even further into the negative across an even wider term. The efficacy of such moves at and below the zero-interest bound are unknown at best.  The prior QE program had little effect on inflation or growth.

FXStreet

A rate cut or other moves by the ECB at this Thursday’s meeting is not expected with the continent and its bureaucrats headed into the August vacation.

The bank will issue new economic projections at its September meeting and the new President Christine Lagarde will take over in November, either date would be more probable for a new policy initiative, with the odds going to after Ms Lagarde’s ascension.

Still with the Federal Reserve set to cuts rates for the first time in a decade next week the direction for the ECB is clear. A policy shift in the next five months is not out of the question if the Eurozone economy deteriorates rapidly though Wednesday’s PMIs are unlikely to make that particular case.