A new month and more signs that European economies are recovering fast, with the manufacturing sector increasingly struggling to cope with the jump in demand and services benefiting from the lifting of restrictions. There is some concern that the latest Covid-19 variant may delay the full re-opening of the UK economy (planned for June 21), but on the whole, things clearly are looking up.
Today, for instance, European stock markets have been under pressure as strong data confirms a strengthening and broadening of the recovery. The upward revisions to Eurozone and UK PMI reports essentially confirmed a broadening and strengthening of growth, as well as mounting capacity constraints, while flagging the risk of higher wage growth ahead.
The UK’s final May composite PMI was unexpectedly revised higher, to 62.9 from the preliminary estimate of 62.0. The headline is a new record high for the data series going back to January 1998. The improvement was driven by a much stronger than expected manufacturing PMI, which rose to a record (since 1992) 65.6. The surveys showed the quickest pace of private sector employment since June 2014. New orders rose by the most since October 2013. Cost pressures rose by the quickest rate in almost 13 years, which were passed on to customers, with prices charged rising the most in over 21 years.
Eurozone Services and Composite PMIs revised higher. Final data for May showed the services reading jumping to 58.2 from 50.5. Survey compiler Markit highlighted that a “resurgent services economy helped to drive private sector growth higher” and national data confirmed that the recovery is not just broadening across sectors, but also countries, with Germany (56.2), France (57.0), Italy (55.7) and Spain (59.2) now all reporting very strong expansion in overall activity.
Private sector new work rose to the strongest degree since June 2008, with new export business lifting for a sixth successive month and the net increase the sharpest since the start of comparable data in September 2014. Companies are struggling to keep on top of the workload, which is also boosting job creation and employment. That latter point will be of interest to the ECB, as if it persists, there is the risk that higher inflation could feed through to wage growth, which in turn could see transient wage pressures becoming entrenched.
The ECB suggested that it will review monthly purchase volumes under the PEPP program at the June 10 meeting. The doves were out in force last month, but Executive Board member Schnabel sounded somewhat more balanced last week and seemed to play down the rise in yields against the background of the recovery. We have seen the dovish and the hawkish camps at the ECB taking extreme positions ahead of the official meeting before – sticking with the “significantly” enhanced monthly purchase levels is one end of the spectrum, while the other will be calls to phase out PEPP purchases early as economies move towards a further easing of restrictions and confidence data indicates a very strong recovery.
There are however still rising odds that the ECB will commit to the existing PEPP envelope and ongoing purchases through to the end of the program, but with monthly volumes being reduced at least to some extent.
On the other hand, the BoE managed to pull this off without scaring markets too much, although the BoE has a fixed QE target, rather than an envelope, and Lagarde will have to make a strong delivery to prevent markets from running too far ahead with a tightening story that could see spreads moving out further than officials would want to see.
Overall in contrast with the ECB’s division, BoE officials not surprisingly seem increasingly optimistic on the recovery and BoE MPC member Vlieghe last week did actually raise the possibility of an early rate hike. However, he stressed that hiking too early would be much costlier than tightening too late. Vlieghe suggested that it remains to be seen whether there will be a smooth transition from the government’s furlough scheme. Until there is proof then that the labour market can cope with the withdrawal of support measures the policymakers are anticipated to continue to downplay recent spikes in price pressures as being transitory.
Nevertheless, the unlocking of the UK economy has released pent-up demand, and consumer confidence has improved markedly amid the evident success of the UK’s Covid vaccination program. Nearly 75% of the adult population in the UK have now received at least one dose of a vaccine. While the pace of improvement has slowed over the last month, the private sector of the UK economy is amid a robust recovery expansion.
The prognosis for the months ahead is looking good. While there has been a creep higher in new Covid cases in the UK, which has caused the prime minister to publicly ruminate that the fourth and final phase of reopening, scheduled for June 21, might be delayed, there are good grounds to expect the prevailing lift in new Covid cases won’t develop into a full blown wave. The spread, which is being driven by the Indian variant, is mostly among younger, unvaccinated people, the vaccinated majority proving to be resistant.
Click here to access our Economic Calendar
Andria Pichidi
Market Analyst
Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
