Friday has the release of partial (or flash) PMI readings for several key global economies. These could provide some vital insight for a market with limited information as a consequence of the US government shutdown. However, the EU and the UK are likely to be the focus for traders as their economies remain sluggish.
PMIs offer an advance look on economic performance and inflation trends, which could be particularly important for Europe in the current circumstances. With inflation near target but growth sluggish, the ECB could be inclined to cut rates one more time, and weaken the Euro. However, that depends on the current trajectory to at least be maintained. The flash PMI figures gives traders the freshest data on economic trends, as it shows information that has been compiled over the last couple of weeks.
Key Indicators for the EU
First to report on Friday is France, which could give the market an indication for where the data will go. French Composite PMI is anticipated come in at 48.5 compared to 48.1 prior. That’s below the 50 level that separates expansion and contraction. France’s indicator is expected to be affected in particular by the political developments over the last couple of months which saw a real possibility for a general election.
Now that the political situation seems to be settling down a bit, markets are not ease. The main problem – France’s deficit – hasn’t been solved and the political crisis suggests that the conditions are not there to solve it. If France continues to spend well above the EU target, it could weaken the credibility of EU institutions and generate further inflation. Higher inflation would prevent the ECB from easing, even if the economy is faltering.
Germany Can’t Quite Return to the Green
German Composite PMI is expected to decline to 50.5 from 52.0 prior. This is largely thanks to a decline in the key manufacturing component. German flash October manufacturing PMI is forecast to fall further into contraction at 49.0 from 49.5 prior.
Optimism in Germany’s economy had risen through the first half of the year amid expectations that the government would increase spending in infrastructure and defense. The government had done away with the debt brake which halted deficit spending. However, German politicians have not been able to agree on how to use that additional spending power, with the budget still being debated in the Bundestag. That delay between announcing the funds and the money actually being spent seems to have weighed on investor sentiment in Germany, which could weaken the Euro.
UK Still Struggling with High Price
The UK’s October manufacturing PMI is expected to stay well in contraction at 46.7 compared to 46.2 prior. But Services PMI is anticipated to show improvement to 51.1 from 50.8 prior. However, this adds to the headache at the BOE, which has been reluctant to ease interest rates due to high inflation in the services sector.
Markets are keen to see if there are any signs of reactivation in the UK economy that can support a stronger pound. So far, GDP indicators were at best mixed, but Wednesday’s inflation was softer than anticipated. It’s still well above the BOE’s target at 3.8%, but at least it didn’t rise to 4.0% as forecast. Friday will also see the release of UK retail sales for September, which are expected to come in at -0.1% compared to 0.5% prior.