Should You Be Worried about the Latest Euro Zone PMIs?

For some odd reason, the latest German and French PMIs remind me of the Red Wedding in the Game of Thrones TV series. What a bloodbath! Should euro bulls start worrying?

Before we start looking at the numbers, lemme give you a crash course on what euro zone PMIs are all about and why they matter.

What the heck is a PMI?

PMI, which stands for purchasing managers’ index, is basically an indicator of business conditions in an economy. It takes into account the various factors affecting the industry, such as the level of employment, production, new orders, inventories, and deliveries then rolls it up into one neat figure. That makes it easier for traders like you and me to gauge whether businesses are doing well or not.

A PMI reading that is higher than 50.0 means that the industry is expanding. In other words, business is good yo! On the other hand, a PMI reading below 50.0 implies that the industry is contracting.

Why do PMIs matter?

Since business activity comprises a huge chunk of an economy’s GDP, an industry contraction could knock off a few points from overall economic growth. With most of the German and French PMIs hinting at a slowdown in the manufacturing and services industries, several analysts began to worry that the entire region could be in for more economic weakness.

How did the latest figures turn out?

For the month of June, France reported an even deeper contraction in both its manufacturing and services industries. Its flash manufacturing PMI fell from 49.6 to 47.8 while its flash services PMI slipped from 49.1 to 48.2, even as analysts were expecting to see a 49.6 and 49.5 reading respectively.

Meanwhile, Germany reported a flash manufacturing PMI of 52.4, lower than the consensus at 52.7. Its flash services PMI landed at 54.8, weaker compared to the estimated 55.8 figure. To top it off, the previous month’s readings were downgraded from 52.9 to 52.3 for its manufacturing PMI and from 56.4 to 56.0 for its services PMI!

As for the euro zone, its manufacturing PMI dipped from 52.2 to 51.9 in June while the services PMI fell from 53.2 to 52.8. This confirms that it’s about time the euro zone got additional monetary policy stimulus from the ECB! “A concern is that a second consecutive monthly fall in the index signals that the euro-zone recovery is losing momentum,” remarked Chris Williamson, chief economist at Markit.

According to the IMF, the euro zone recovery is “neither robust nor sufficiently strong.” They also pointed out that inflation is “worryingly low” and that the 11.7% unemployment is “unacceptably high.”

Does this mean that the ECB should gear up for another round of easing? Although they already slashed several interest rates in their latest rate statement, their other policy adjustments suggest that they are setting up the stage for more LTRO. Vice President Victor Constancio even mentioned in his testimony last week that asset purchases are the next step policy makers are prepared to take if the economic outlook worsens.

Will the weak German and French PMI reports force the ECB to ease further? Share your thoughts in our comment box or cast your votes in our poll below!