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With German and French numbers out, it was already clear that aggregate Euro-area PMIs would disappoint compared with consensus expectations and later on Euro-area composite PMIs dropped to 54.1 from 55.1 in April with both manufacturing and services significantly down, points out Anders Svendsen, Research Analyst at Nordea Markets.

Key Quotes

“French composite PMI was much lower than expected at 54.5 in May (consensus: 56.8), down from 56.9 in April. The weakness was driven by weak services while manufacturing was surprisingly strong.”

“German PMIs surprised negatively too. German composite PMI fell to 53.1 in May from 54.6 in April, driven by disappointments in both manufacturing and services.”

“The economic implications are complicated by the fact that growth momentum was never as high as the PMIs indicated that it should have been. Thus, despite the lower PMIs the relationship between PMIs and GDP growth suggests slightly higher growth momentum in Q2 compared with Q1.”

“The EUR is weakening, which should give some leeway to the Euro-area growth, but at the same time energy prices have risen a lot and interest rates are gradually climbing higher. In sum, we believe that more downside could be ahead for PMIs in the near term, which will add downside risks to our latest growth forecasts.”

“The PMIs add complications to the ECB’s exit from net asset purchases.”

“Markets reactions

The weaker Euro-area PMIs have emphasized the recent trends in the FX markets, with lower EUR/USD and EUR/CHF as a result. The weakening PMIs supports our strategic view that soft indicators will continue to fade, which leaves elevated risks of a further move lower in EUR/USD. Also this reaffirms our view, that there is still no reason to expect any “taper-tantrum” in the EUR curve to be around the corner. Market rates initially dropped, but has almost recovered fully, perhaps as a result of Markit’s notion of caution.”