Eurozone May flash services PMI 53.3 vs 53.5 expected

• Prior 53.3
• Manufacturing PMI 47.4 vs 46.2 expected
• Prior 45.7
• Composite PMI 52.3 vs 52.0 expected
• Prior 51.7

The better German report earlier helped to offset the slight initial concerns from the French report. At the balance, it still affords the ECB some added room to work with after a June rate cut. EUR/USD is holding little changed at 1.0828 after a brief brush against its 100-day moving average of 1.0814 earlier. HCOB notes that:

“This looks as good as it could be. The PMI composite for May indicates growth for three months straight and that the
eurozone’s economy is gathering further strength. Encouragingly, new orders are growing at a healthy rate while the
companies’ confidence is reflected by a steady hiring pace. This time, there is also some good news for the European
Central Bank (ECB) as the rates of inflation for input and output prices in the services sector has softened compared to the
month before. This will be supportive for the apparent stance of the ECB to cut rates at the meeting on June 6. However, the
better inflation outlook will be most probably not be enough for the central bank to announce that further rate cuts will follow
suit.

“We are heading in the right direction. Considering the PMI numbers in our GDP nowcast, the Eurozone will probably grow
at a rate of 0.3% during the second quarter, putting aside the spectre of recession. Growth is mainly driven by the service
sector whose expansion was extended to four months. Manufacturing acts less and less as a stumbling block for the
economy and optimism about future output has increased further in this sector. With all this in place it seems plausible that
GDP growth of almost 1% could be reached this year, and there is even some upward risk.

“Looking for the fly in the ointment? Well, you will find plenty of them, especially in the manufacturing sector. While
manufacturers have almost stopped reducing their production levels, inventories of purchased goods and final goods
continue to shrink at even faster paces than during the last month. And while the indices for new orders, employment and
backlogs of work have all increased, they are still well below the expansionary threshold. Thus, according to our Nowcast
calculation, which considers the PMI indices, the recession in the manufacturing sector remains present in the current
quarter.

“The German economy is outshining the French one, driven by a robustly growing services sector which is shrinking in
France. The manufacturing sector’s development is less severe in France, but as in Germany the sector has not yet
escaped recession. While people love to compare the performance of economies, finger pointing to the possible
weaknesses and strengths, the good news here is that overall, both economies move in tandem. This means that there are
good chances for France to catch up eventually in the services sector which would put eurozone growth on a sounder
footing.”

This article was written by Justin Low at www.forexlive.com.