Missing The Endzone

Europe and US PMIs

Image source: hornyak, Lightkite, charnsitr, Julinzy - Shutterstock

What's going on?

Data out on Friday showed that eurozone economic activity picked up in June – but compared to the US, it left something to be desired.

What does this mean?

A monthly survey of business managers showed companies in the eurozone did more overall in June than May. The services industry (including retail and hospitality) grew, which offset ongoing shrinkage in manufacturing. Weakening eurozone economic growth and uncertain trade tariffs seemingly dampened business spending: new orders for eurozone manufacturers continued to fall in June.

Comparable US data out on Friday showed the land of stars and stripes in better shape: its services and manufacturing sectors both grew in June, albeit more slowly than in May.

Why should I care?

For markets: Pink sky in the morning…

Although the eurozone appears to be recovering, it’s probably not enough to stop the European Central Bank (ECB) lowering interest rates to give the economy a boost, as it said it might last week. Investors continued to snap up über safe German government bonds. Along with the ECB, they may be erring on the side of caution – such surveys have been poor predictors of actual economic growth recently. Friday’s improvement may prove a false dawn, and the eurozone might require further support yet.

The bigger picture: Race to the bottom.

Stateside, the data suggests the Federal Reserve was right to imply rate cuts on the horizon. Lower interest rates would make borrowing cheaper and encourage spending, likely leading to more activity. And the ECB looks set to do the same: Europe is perhaps even more in need of a helping hand. The values of both currencies may fall if rates are lowered as investors take their dollars and euros elsewhere in search of higher returns. And the economic boost each would get from lower rates partly depends on how much each currency falls: a cheaper euro versus the dollar may push export orders in the eurozone’s direction.

Originally posted as part of the Finimize daily email.

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