Euro Surges Higher After Rise in Manufacturing PMI Suggests Growth Continued Apace in October

Eurozone manufacturing activity rose sharply in October, according IHS Markit survey data released on Tuesday, suggesting Eurozone growth continues apace.  

IHS Markit’s flash manufacturing PMI showed industrial activity surprising on the upside in October with an index reading of 58.6, topping September’s figure of 58.1 as well as economist expectations for an October reading of 57.8. .

The Services PMI, on the other hand, missed estimates with the monthly index registering a steeper than expected monthly fall, coming in at 54.9. This was well below September's 55.8 result and the 55.6 consensus forecast.

The Euro rose strongly after the release with GBP/EUR falling to 1.1205 and EUR/USD rising from 1.1750 to 1.1760 in the minutes after the release, underlining the relative importance of manufacturing to the Eurozone economy.

"The rate of job creation was the strongest in over a decade. Service providers took on extra staff to the greatest extent in seven months, while manufacturing jobs growth was the strongest since data collection began in June 1997," says Andrew Harker, a director at IHS Markit, the survey compiler.

The report flags a continued rise in exports during the month and notes that the stronger Euro has not impacted on demand for Eurozone goods.

“On the basis of past form, the PMI is consistent with quarterly euro-zone GDP growth of around 0.6% at the start of the Q4,” says Stephen Brown, an economist at Capital Economics.

Core economies such as France and Germany were the main drivers behind October's result while activity on the periphery was less robust.

“While the euro-zone Composite PMI declined, it still points to healthy GDP growth. So the ECB is likely to feel that a decision to taper its asset purchases is justified,” says Brown.

Goods price inflation was a key theme in the report with many survey respondents noting an uptick in input costs during the period, which could suggest underlying inflationary pressures are building in the Eurozone.

“Nevertheless, with inflationary pressure rising only slowly, we also think that the ECB will strengthen its forward guidance to indicate that interest rates are unlikely to rise until 2019,” Brown adds.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

Why is the PMI Survey Important?

The October PMI data offers the most up-to-date assessment of economic activity in the Eurozone.

The surveys are compiled by interviewing a sample of purchasing managers in manufacturing and services companies in the Euro area and then compiling the results into a gauge, which indicates whether the sector is expanding or contracting.

If the gauge comes out above 50, it suggests the sector is in expansion mode, if below 50 then that it is contracting.

Analysts suggested a result in line with consensus estimates would be an overall positive indicator for Q4 growth.

"An outcome in line with the consensus estimates would imply still strong activity growth in the first month of Q4," said DNB Bank ASA's  Analyst, Knut Magnusson.

Lloyds Commercial Banking's Economist Rhys Herbert expected services PMI to rise (wrongly), adopting a contrarian stance to the consensus view.

"For the services PMI, we have penciled in a slight increase to 56.0 from 55.8, while the consensus forecast is for a small decline.

In essence, business confidence remains at levels consistent with a continued robust pace of economic expansion."

Further endorsing the view that PMI's - despite edging lower - would paint a picture of robust growth in the region, was Nordea Bank SA Analyst, Uffe Kalmar Hansen, who said: 

"We expect a small decline in the PMI readings (October flash) to a level that still suggests very solid growth also in Q4."

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.