Eurozone September PMI Preview: Keeping the lockdown bump?

Business sentiment in the Eurozone will continue at its best levels in two years despite the second wave of COVID-19 cases in a several countries and the unsettled Brexit negotiations.

Manufacturing sentiment in the Markit purchasing managers’ index is expected to rise slightly to 51.9 in September from 51.7 in August. Service sector sentiment is forecast to be unchanged at 50.5 and the composite index may drop to 51.7 this month from 51.9 prior.

EMU manufacturing PMI

FXStreet

Business attitudes in the Eurozone factory sector have returned from almost two years in a steady state of contraction after plunging to record lows in the spring pandemic. 

Manufacturing PMI at 51.8 in July was the first positive reading in 17 months, since 50.5 in January 2019. Index scores above 50 denote expansion, below contraction.  The April trough at 33.5 was the lowest on record just above the 33.9 score in December 2009.  

Services sector attitudes dipped into contraction with the shutdowns, falling to 26.4 in March from 52.6 in February. The April score of 12 was by far the lowest on record, much weaker than the financial crisis bottom of 39.2 in March 2009.  July’s rebound into expansion at 54.7 was the highest index since the same score in October 2018. The composite score of 54.9, also in July was the best since June 2018.

In one sense the pandemic closures seem to have given the business community in Europe sense of perspective.  After the business debacle of March April and May, things could only improve.

German, French and Italian manufacturing PMI

Italian and German manufacturing were in decline long before COVID-19 struck the continent.  

Germany registered 18 months of negative PMI readings, from December 2018 to this June, before climbing to 51 in July and 52.2 in August.  It is expected rise to 52.5 in September.

German manufacturing PMI

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Italian factories likewise were in contraction for 21 months, from October 2018 through June 2020, before July’s jump to 51.9 and 53.1 in August; 52.5 is projected in September.

French manufacturing sentiment had maintained a positive attitude up until the pandemic. Scores from January 2019 through this January were all above 50 except one and the shutdown inaugurated only a three month decline.  The August dip to 49.8 is expected to revert to 50.5 in September.

Brexit

The increasingly acrimonious negotiations over the terms of the trade relationship between the UK and the EU and the prospect of a no-deal transition are reminiscent of the rhetoric and brinkmanship around the original departure agreement.  Business managers have studiously ignored the possibility of a breakdown in talks. At least it is not reflected in the PMI indexes which would be much worse were a hard-Brexit contemplated. In this experience is the leader.  The talks will probably proceed in tones of rising exasperation and volume, until, at the minute a solution is found.

Conclusion and the euro

The precipitate collapse of European economics in the spring and early summer seems to have forced a reevaluation of business attitudes.  While in any absolute sense the current economic situation in Europe is no better than it was before the pandemic attitudes have improved substantially.  Relatively of course, things are much better.

The ascent of the euro against the US dollar from mid-July until early September was based on the final withdrawal of the greenback’s pandemic premium and, beginning in the middle on August, the notion that rising COVID-19 case in several states would cripple the US recovery. 

That did not happen and the likelihood that the historically more energetic US economy would again outstrip the Eurozone has dropped the united currency back to the bottom of its seven-week range.

Better than expected PMI scores would suggest that the Eurozone recovery is strengthening, and that in turn would help put a floor under the euro.