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JPY Stronger After Spate Of Stronger Data

-- Private sector business activity in Germany and the wider-Eurozone remains
-- ECB still on track to normalise monetary policy, albeit in a measured fashion
By Jaspreet Sehmi
     LONDON (MNI) - Flash PMI survey data released this morning showed that
German private sector business activity growth moderated slightly in September,
with the composite index edging down to 55.3 (from 55.6 in August), mildly below
the 55.4 consensus projection. The constituent manufacturing index fell more
sharply than analysts expected (to 53.7 from 55.9 in August) while the services
index, which was anticipated to hold steady, surged to 56.5 from 55.0 last
     Below, we highlight five key points following the release:
     Manufacturing PMI Falls Below Recent Average: The manufacturing PMI - which
dipped only marginally under its past three-year average in June - moved
decisively below it in September, falling to its lowest level in just over two
years. While it remains comfortably above the 50-mark, which separates
contraction from expansion, the sharp move lower is a cause for concern, even if
it is not particularly surprising given recent hard data developments and
persistent external headwinds. July data revealed a further slump in
manufacturing orders and another contraction in industrial output over the
month. Today's PMI data suggests that any recovery in factory orders and output
in the coming months is likely to be relatively restrained.
     Services Strength Keeps Growth Afloat: The situation in the services sector
is far brighter, with the services PMI rising above its manufacturing
counterpart for the first time since November 2016 and sitting at an eight-month
high. This chimes with our expectation for services to be the main engine of the
German economy in coming quarters, with the sector much more insulated from the
external headwinds buffeting industry, which include cooler global demand,
protectionist concerns, Brexit uncertainties and emerging market tremors.
     Inflationary Components Show Some Softening In September: Both the input
cost and prices charged inflation gauges retreated in September, pulling back
from seven-month highs in August. Nevertheless, firms continued to report rising
salary pressures and higher raw material prices. While energy price base effects
could see input price inflation retreat further over the coming months, rising
labour costs and increasingly binding capacity constraints suggest that
underlying inflationary pressures are gradually building. We expect this
divergence to be corroborated by the official inflation data, which should see
the headline rate trend lower and the core rate creep higher over the coming
     Composite PMI Points To German GDP Growth Of 0.5% q/q In Q3: As we have
pointed out previously, the quarterly average composite PMI index appears to be
a relatively good coincident indicator of quarterly German GDP growth. The
average Q3 composite PMI reading (55.3) points to GDP growth of around 0.5% q/q,
following on from 0.4% and 0.5% in Q1 and Q2 respectively.
     Eurozone-wide Developments Mirror Germany: At the aggregate Eurozone level,
the manufacturing PMI dipped by 1.3 points to a two-year low of 53.3 in
September, while the services index rose by 0.3 to 54.7, leaving the composite
PMI at a four-month low of 54.2. France - the only other member state for which
September flash data was published this morning - saw its composite index fall
from 54.9 to a 21-month low of 53.6. Nevertheless, France's average Q3 composite
PMI reading still indicates that GDP growth will pick up this quarter from Q2's
0.2% q/q. At the Eurozone-wide level, Q3 PMI data point to quarterly growth of
around 0.4%, unchanged from Q2 and remaining slightly above the region's
potential growth rate. As such, the ECB remains very much on course to continue
with its policy normalisation plans. A much sharper deterioration in both the
survey and hard data would be needed to prompt the central bank to hold fire.
However, with underlying inflation still weak and external developments weighing
on the economic growth picture, policymakers will continue to stress that
interest rates will stay on hold at least through next summer.
--MNI London Bureau; +44 207-862-7489; email:
[TOPICS: MAGDS$,M$E$$$,M$G$$$,M$X$$$,M$XDS$]