European Data Wrap: May Flash PMIs, BoE/ECB implications hawkish

Analysis details (15:05)

EZ Flash PMIs, May

• Overall, PMIs are at a multi-month low with pronounced manufacturing pressure accompanied by a sharp increase in service sector prices. ECB implications are hawkish.
  


• EU HCOB Composite Flash PMI (May) 53.3 vs. Exp. 53.5 (Prev. 54.1); Manufacturing 44.6 vs. Exp. 46.0 (Prev. 45.8); Services 55.9 vs. Exp. 55.6 (Prev. 56.2)


• A release which followed the French and German Flash metrics all of which saw the Manufacturing measures miss expectations while the Composite and Services figures were more mixed. The initial French metrics sparked pressure in the EUR and lifted the Bund, while the German metric added to EGB upside and brought EUR/USD back above the 1.08 mark. The EZ-wide release sparked little immediate reaction, but has been a factor in EGBs ultimately coming under marked pressure with the German 10yr nearing 2.50% given the hawkish implications of the pricing components, particularly services. S&P/HCOB wrote the ECB "will have a headache with the PM price data. This is because selling prices in the services sector actually rose more than in the previous month… upward momentum…” is preventing the ECB from pausing. Additionally, ING reminds that wages are the most important input cost for services and the faster increase in wages which is in-turn supporting demand has sparked another increase in price expectations.


• On the growth side, EZ GDP is likely to see Q2 growth given a strong service sector; though, the Manufacturing component is a “powerful drag” on the overall economy; on this point, Manufacturing New Orders and work backlogs continue to drop. As a reminder, the eurostat flash estimate for Q1 GDP was 0.1% QQ SA for the EZ, details here.

UK Flash PMIs, May

• Overall, the economy’s growth trajectory is set to improve QQ in Q2; however, this is spurring renewed inflationary pressures which could challenge the BoE’s call for an easing in inflationary pressures and as such have hawkish policy implications.
  


• UK Flash Composite PMI (May) 53.9 vs. Exp. 54.6 (Prev. 54.9); Services 55.1 vs. Exp. 55.5 (Prev. 55.9); Manufacturing 46.9 vs. Exp. 48.0 (Prev. 47.8)


• S&P writes the survey is consistent with growth of 0.4% in Q2 following Q1’s 0.1% print. An increase which is sparking renewed inflationary upside as the Services side struggles to meet demand and as is able to raise prices and offer staff higher wages. Specifically, “strong wage inflation meant that service providers experienced the fastest rise in their cost burdens for three months”. Albeit, the situation differs on the smaller manufacturing side where both output and prices are being pushed lower. In terms of BoE implications, S&P writes the key Service sector suggests the MPC has “more work to do to quash stubbornly high inflationary pressures”. More generally and further ahead, both Manufacturing and Service respondents highlighted weaker business optimism than in April, factors cited include the broader economic outlook, higher rates and residential property weakness.


• Back to the BoE, the release is overall hawkish in its implications and comes ahead of the key April CPI print on May 24th. At the May MPR, Governor Bailey said that inflation will fall over the coming months and that this will be evident in the April metric.

23 May 2023 - 15:05- Fixed IncomeData- Source: Newsquawk