The Daily Update: PMIs as disappointing as the Euros

Yesterday we had PMI data from across Europe; this is keenly watched as an up-to-date indicator, being August data. We started with some disappointing data from France as the manufacturing PMI hit a four-month low and French Services were recorded at a six-month low. Germany was no better as manufacturing fell to 62.7 from 65 expected, leading the overall Eurozone manufacturing indicator down to 61.5 from 62.8 in July.

Similar was seen in the UK as the composite fell to 55.3 with expectations looking for 58.7, the lowest level in six months. However, while there was manufacturing weakness in the Eurozone, with component bottle necks and staff shortages, in the UK it was Services that had a hard fall, from 59.6 to 55.5. As a note, do you remember the levels at the end of 2018, the UK services index was only a little above 51, before the pandemic, with virtually no inflation and the BoE trying to engineer higher prices; moving swiftly on.

There are certainly clear signs of a loss of economic momentum across Europe, but with government backed furloughs about to end in the next month or so the supply bottlenecks hitting prices and wages should end. Indeed, it is thought that in the UK past the September deadline on furloughs we shall see a pickup in unemployment which will ease wage inflation and help broader inflationary measures back towards the BoE trajectory at 2%, if they can even get there, back at 1% to 1.5% is more likely in our view.

The US August PMIs were in line with the UK as services took a hit, 59.2 expected and 55.2 landed, with the composite dropping to 55.4 from 59.9 in July. It would appear that the US and UK are at a similar juncture on the path to recovery, while the Eurozone looks to be a few months behind.

We still look for demographics and innovation to put downward pressure on prices and this global pickup in inflation is no more than a transient period of pricing which will not continue as soon as vaccinations and lockdowns are all completed. Even so we remain concentrated in higher credits as the reward for exposure to lesser names is just not there.

Have a good day.