The release of flash PMIs from certain key economies on Thursday is likely to give some key insight into how tariffs are affecting economies. This could be particularly important for the Euro and the dollar, as there is considerable debate on what the ECB and Fed will do now. The European central bank is in an open debate about whether to pause its rate cutting cycle. Meanwhile the Fed has said it is waiting for more data to decide when to start cutting.
After a series of cuts to global economic growth, markets will be keen to see if that is being reflected in the data, or if there are signs of growth. For monetary policy in Europe, this is particularly important as it could be the determinant factor for when the ECB goes into a holding pattern with rates. For the US, many speculate if there are mounting signs of US economic slowdown, the Trump Administration might be more accommodating on trade deals.
BOJ and the Fading Rate Hike Outlook
Flash May composite PMI for Japan is expected to starkly slow to 50.4 from 51.2 prior. While that’s still marginally in expansion by being over 50, the slowdown will likely make things difficult for the BOJ’s desire to raise rates in the medium term to stave off high inflation.
The slowdown in the Japanese economy has led to a return of yen weakness, which might encourage carry traders to come back into the game. What has been saving the USDJPY lately has been a weaker dollar, which could reverse due to factors outside of Japan. A stronger PMI, on the other hand, could indicate resilience in the Japanese economy and keep further hiking on the table.
Euro Area Rate Debate and Complications
Both French and German manufacturing PMIs are expected to show a similar pattern, rising marginally but staying in contraction. But what the ECB is worried about is persistently strong pricing in the services sector. This has been offsetting weakness among manufacturers. So, if the composite reading settles down, it might make the case for more easing.
French flash composite PMI is expected to advance to 48.2 from 47.8 prior. Then German composite PMI is expected to advance into expansion to reach 50.7 from 50.1. However, the composite PMI for the whole of the EuroZone is seen staying unchanged at 50.4. The market is pricing in a 90% chance of a rate cut at the next ECB meeting based on expectations that the economy will remain weak until then.
UK, US Getting Back to Normal
The British economy seems to be recovering from the impact of higher taxes slapped on last year, and has been doing better than most economists have predicted. However, this has kept inflation elevated, and the BOE reluctant to ease. Advancing PMIs, even if they are still in contraction, would likely reinforce that narrative. UK flash May composite PMI is projected to bump up to 49.0 from 48.5 registered last month.
Both manufacturing and composite PMIs in the US are expected to remain in expansion, but barely so. The drag is mostly attributed to future growth prospects, as businesses remain uncertain about the effect of tariffs. But, keeping the measure in expansion would give the Fed an excuse to hold rates for more data. US flash May composite PMi is projected to decline marginally to 50.4 from 50.6 prior.
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