This time around, PMI figures could be significant for determining the trajectory of currencies. That’s because central banks are in a transition period around monetary policy. Some, like the ECB, are about to stop cutting interest rates. Others, like the Fed, are expected to resume easing. The price component of PMI figures could be determinant for the market’s expectations for the September central bank meeting cycle.
Typically, markets focus on manufacturing as a sign of economic health. But with services inflation getting more attention from central bankers, the services PMI could be the focus for traders. There has been some ambivalence in the data about how tariffs are affecting inflation. That could be cleared up with the trends that purchasing managers report on Thursday. Note that these figures are from incomplete surveys and could be revised at the start of next month.
What to Look Out For
Japan is expected to report a decline in flash August services PMI to 52.8 from 53.6. The country has recently seen a turnaround in inflation trends, but the BOJ is still under pressure to raise rates. With inflation well above target, markets will likely be looking for some clear trends that price pressure is easing. The consensus is that the BOJ will likely raise rates one more time before the end of the year.
Will the ECB Hold the Line?
Inflation in the EU is largely in line with the central bank’s target. But that’s a problem, because the shared economy is experiencing sluggish growth. The uptrend in the Euro this year has been based on the hope that the European economy would take off. But that would also mean higher inflation. The ECB can keep its current wait-and-see stance on rates as long as inflation and growth remain stable.
German August flash services PMI is projected to remain barely in expansion at 50.3, but down from 50.6 in July. Germany is seeing the strongest inflationary pressure among the major European nations. Euro Area August flash services PMI is projected to decline slightly to 50.8 from 51.0 prior. It is worth noting that prior gains have relied on the projections component.
BOE to Stay Hawkish?
After better-than-expected job and GDP figures, the BOE has been justified in its “hawkish” cut at the last meeting. With hot inflation and economic headroom, markets now only see a 40% chance of a rate cut for the rest of the year.
But if service inflation continues to decline, the market might start raising bets for a rate cut. This could weaken the pound. The expectation is for UK August flash services PMI to remain practically unchanged at 51.7 compared to 51.8 a month earlier.
Are Tariffs Pushing US Inflation?
The dissonance between CPI and PPI in the US has left some analysts wondering just how much impact tariffs are having on inflation. The discrepancy could be explained by rising wholesale prices, but businesses are having difficulty passing those costs on to consumers. PMI figures could help clarify if that’s the case. If purchasing managers report increased inflationary pressure, the market could expect a more hawkish stance from the FOMC at the Jackson Hole Symposium.
US flash August services PMI is expected to drop substantially to 53.0 from 55.1 prior. But that could also be a result of timing, as the global tariff regime went into effect at the start of the month. It could take a few months before the full effect on prices filters through to the data.
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