3 Things You Should Know About the Euro Zone PMIs

Heads up, forex fanatics! We’ve got a slew of PMIs coming out of the euro zone tomorrow.

At 7:00 am GMT, France will start the show with its manufacturing and services PMIs. Then at 7:30 am GMT, Germany will follow up with its own reports. And finally, at 8:00 am GMT, we’ll take a look at the big picture as the euro zone-wide PMIs will be released.

Here are three things you should know about these reports!

1. Why these PMIs are important

I’m sure you’re all fully aware that the euro zone just emerged out of its longest recession in 40 years.

Though it’s definitely relieving to see the euro zone finally post positive growth, many are still unconvinced about its recovery. After all, growth remains uneven across the region and the economy still faces many headwinds. This partially explains why the markets hardly reacted to news that the economy had grown 0.3% in Q2 2013, exceeding forecasts for a 0.2% expansion.

Now more than ever, markets are interested in seeing how the economy will fair in the coming months. They want confirmation that the rebound we saw last quarter wasn’t just a fluke, and the PMIs may just serve that purpose.

Unlike the GDP report, which is a lagging indicator, the PMIs are leading indicators of economic health. What this means is they have stronger implications on future growth and can provide more insight as to whether the recovery is gaining steam in Q3 or if what we saw in Q2 was nothing but a dead cat bounce.

2. What the markets are expecting

Euro Zone PMIs

Following the strong readings we saw last month, market junkies are expecting to see further improvement in business confidence across the board. After all, the rise in both domestic and foreign demand should lead to an overall rise in activity.

The services sector, in particular, will likely get support from an increase in consumer confidence and less drag from austerity measures.

However, it will be the manufacturing PMIs that you will have to keep an eye out for. The German manufacturing PMI is probably the most important as the value of the country’s massive industrial exports contributes a sizable chunk to the euro zone’s overall productivity. Meanwhile, France’s figure is predicted to finally print an expansion from last month’s reading of 49.7 to 50.4.

3. How the markets may react

Obviously, if the PMIs out-perform forecasts across the board, it would paint a rosy outlook for the region and would suggest that the recovery has picked up its pace in Q3. That being the case, such results will likely be euro bullish.

On the other hand, if all releases show disappointing results, we can reasonably expect the euro to weaken, as it would provide confirmation that the euro zone hasn’t exactly gotten out of its rut.

There’s also a chance that mixed results could also work against the shared currency if they show uneven growth across the region. For instance, if French and German PMIs show strong results but the euro zone-wide PMIs fail to impress the markets, it would imply highly uneven growth in the region, with weakness in the peripheral countries.

But then again, these are just my two cents on the matter. How do you think the PMI reports will play out?