Markets
Today’s name of the game was the May PMI business confidence. European PMIs were strong and showed a reversal of what we have seen since the lockdowns were reimposed in 2020Q4. In May, the services sector outperformed (on a relative basis obviously) manufacturing. The Eurozone composite indicator rose from 53.8 to 56.9, dragged higher by a strong increase in the (especially French) services sector from 50.5 to 55.1 – the highest reading in three years. The manufacturing gauge stabilized at a historic 62.8 (slightly down from 62.9 in April). Backlogs rose in both services and manufacturing (to a record high even) as new orders roll in at a solid-to-strong pace. Companies respond by hiring but note that they are having difficulties finding staff. One striking observation is that output in manufacturing declined despite very strong demand. This is because of a new record lengthening of input delivery times with global supply chains deteriorating further. Finally: prices. Input and output prices advanced at a record pace in manufacturing. Prices charged in services grew the fastest in two years. PMIs in the UK were outright impressive, topping already sky-high readings back in April. The composite index went from 60.7 to 62, the highest since data collection began in 1998. Both sectors supercharged the combined figure with pandemic restrictions in the UK rolled back much more compared to the EU. Service sector activity expanded at the fastest pace since October 2013 (61.8 from 61). New business and backlogs increase at the sharpest rate for more than seven years, paving the way for strong job creation. Manufacturing surged to a record 66.1 (from 60.9), helped by a steep increase ( and in many cases to an all-time high) in new orders, employment, production and backlogs. Prices charged in the private sector shot up at the fastest rate in almost 22 years. Manufacturers pointed at higher shipping costs and raw materials and service providers noted increased staff salaries.
While the PMI data more or less painted a similar optimistic picture going forward in Europe and the UK, the market reaction was quite different. In an initial response, EUR/USD and European yields lost a tad. Both soon erased losses to trade virtually unchanged before ECB President Lagarde came to shake things up a little. She struck a dovish tone, saying she spotted the latest yield increases and that the ECB is closely monitoring it. Lagarde added the ECB is committed to preserve favorable financing conditions and that those will be assessed in June. Her comments caused a kneejerk downleg in German yields, with the curve bull flattening 2 to 2.4 bps at the middle and long end. Long US yields lose about 1 bp. EUR/USD slipped below 1.22 to 1.219. Sterling ignored consensus-beating, record-breaking April retail sales this morning but liked the PMI outcome. EUR/GBP retreated from 0.863 pre-release to just south of 0.86 currently after testing a minor support area at around 0.858.
News Headlines
In its monthly report, the German Bundesbank expects the economy to grow again substantially in the second quarter (after a 1.7% contraction Q/Q in Q1) supported by activity in the industry and construction. Activity is expected to return to a pre-corona level in autumn. The Buba expects that base-effects and other one-offs could temporarily raise German inflation to 4% at the end of this year. Such a level would be the highest since the introduction of the euro.
Producer prices in Poland signaled a further building of inflationary risk. Factory gate prices in April rose 0.5% M/M to be up 5.3% Y/Y (4.9% expected). The April PPI rise was the highest in almost a decade. The data confirmed other recent evidence by the CPI and wage data of higher price pressures. After a ‘soft’ start, the data supported further zloty gains after EUR/PLN dropped below the 4.51 support yesterday, currently trading in below 4.49. Yesterday, the Polish Finance Minister in an interview indicated that he would prefer Polish inflation at a lower level.
