Euro-Dollar Won't Like the Details of this PMI Report

France flattered an otherwise concerning Eurozone PMI data release. Image © Adobe Stock.

New survey data shows the Eurozone economy outperformed expectations in August, but forward-looking elements of the latest Purchasing Managers Index (PMI) report warn of a slowdown.

The Euro to Dollar exchange rate (EUR/USD) was surprisingly subdued in the wake of news the Eurozone economy performed better in August than economists expected.

EUR/USD was quoted at 1.1147 after the Eurozone composite PMI rose to 51.2 in August from 50.2 in July and exceeded estimates of 50.1. The outperformance was driven again by a strong services sector PMI of 53.3, materially higher than July's outturn and the consensus estimate of 51.9.

France appears to have received an Olympic pump, with a strong services PMI of 55, which was well ahead of the 50.3 expected.

The Euro's muted reaction to the PMI headlines confirms some disappointing developments were uncovered by these data.

"At first glance, this looks like a pleasant surprise: activity in the Eurozone picked up in August. But a closer look at the numbers reveals that the underlying fundamentals might be shakier than they appear," says Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

Germany was once again the weak spot in the Eurozone, with the composite (48.5), services (51.4) and manufacturing PMIs (42.1) disappointing against expectations and warning of economic contraction.

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In fact, Germany's outturn and an apparent temporary Olympics-linked boost will potentially limit upside enthusiasm in the Euro.

It was also reported that August data pointed to a fractional reduction in employment in the eurozone’s private sector, thereby ending a seven-month sequence of expansion.

The second consecutive month of broad stagnation in staffing levels was recorded amid a modest increase in services employment and a solid fall in manufacturing workforce numbers. Staffing levels were down in Germany and France but rose elsewhere.

Firms also reported waning confidence regarding the future outlook for output. Sentiment dropped to the lowest in 2024 so far and was below the series average. Reduced optimism was widespread, with confidence lower across Germany, France and the rest of the eurozone, as well as in both monitored sectors.

The pace of inflation meanwhile eased to an eight-month low, with services input prices rising at the softest pace since April 2021, while manufacturing cost inflation was unchanged from the 18-month high seen in July. That said, selling prices increased at the fastest pace in four months and at a stronger pace than the series average.

Services charges rose at the sharpest pace in three months, while manufacturing output prices increased for the first time since April 2023.

"The ECB might find some reassurance in the latest price indices. Input costs in the services sector, which are closely watched by monetary authorities due to the significant role wages play, rose at the slowest pace in 40 months. So, even though output prices in the service sector climbed faster than they did in July, the easing of cost pressures strengthens the case for an interest rate cut at the ECB's September meeting," says de la Rubia.