Eurozone: PMI boom - Nomura

Yesterday’s flash PMI data for November were noteworthy for the positive surprises from France and Germany and both the manufacturing and service sector components, according to analysts at Nomura.

Key Quotes

“Perhaps less widely appreciated, however, was the near-universal strength in nearly every component in the detail of these surveys. In France, Germany and the broader eurozone the pace of growth in orders, output, employment, input prices and output prices stepped up a gear. In many cases that growth moved up to multi-year highs and in some instances it moved up to the highest levels in more than a decade.”

“In short there was overwhelming evidence to suggest that the two biggest economies in the eurozone are firing firmly on all cylinders and in Germany more specifically that overheating pressure may be starting to emerge. These PMI surveys indicate GDP growth in the eurozone in Q4 could climb by 0.8% q-o-q, well above our current (and the ECB’s) forecast. But even if eurozone growth achieves our more sobering forecast in Q4 (of 0.5% q-o-q) and sustains that momentum in 2018 (as we expect) the region’s output gap will continue to close. And that, in turn will, in our view, force core (and wage) inflation higher.” 

“We think it will take a few more months before the ECB feels confident that this growth momentum is being sustained and that inflation is hot on its heels. However, we remain confident in our out-of-consensus view that this will – at some point next year – cause the ECB to rethink its monetary stance. Specifically, around the middle of next year, we expect the ECB to announce that its asset purchase programme will cease from next September.”

“Some softening of the forward guidance may then follow, perhaps at some point in Q3 2018, and this would prepare the market for a modest 10bp increase in the deposit facility towards the end of 2018. We recognise that this is at odds with the ECB’s current thinking as revealed in today’s minutes from the October meeting. But it reflects our view nevertheless that this thinking can and indeed should change if the underlying fundamentals improve by more than the ECB expects. Indeed, those same minutes reveal that “a few members” presently prefer a clear end date to the asset purchase programme and favour delinking the forward guidance on QE from the requirement of a sustained increase in inflation. And this is in line with recent suggestions from the ECB that the guidance could be softened in the coming months.”