The Purchasing Managers’ Index (PMI) is a great monthly indicator of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarises whether market conditions are expanding, staying the same, or contracting as viewed by purchasing managers. The PMI reading can range between 0 and 100. If the index reading is higher than 50, then it indicates economic expansion. The closer the reading is to 100, the higher the degree of positive economic growth. A reading of 50 indicates no change in the economic environment.
Most recently, the PMIs for August delivered a pessimistic update on service sector conditions in the Euro area and China.
Source: BCA Research
The Eurozone services index was unexpectedly revised down from 48.3 to 47.9 – indicating a more pronounced decline in service sector activity than the flash estimate. It marks the first drop below the 50 boom-bust line since December and the lowest print since February 2021. The weakness is broad-based across the bloc with the four largest Euro area economies all posting sub-50 services PMIs in August.
Although China’s Caixin Services PMI remains in expansion, its 2.3-point decline to 51.8 in August disappointed expectations of a more muted deterioration to 53.5. Last week’s alternative NBS gauge for the non-manufacturing PMI also showed a more pronounced slowdown in the pace of activity than anticipated.
These PMI updates confirm the relative resilience of the US economy. Such data are bullish for the US dollar, which has been the best performing G10 currency since mid-July. It appears that inflows into both US equities and bonds have reaccelerated which suggests that risks to the US dollar are to the upside in the near term.
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