Markets
The European February composite PMI released today matched January’s 50.2 reading. That’s suggestive of near negligible output growth. Services was still the main driver but expanded at a slower pace (50.7 from 51.3). The 23-month long downturn in manufacturing eased slightly (47.3 from 46.6). France was to blame for the marginally weaker-than-expected outcome with a marked reduction in (services) business activity. German activity actually picked up to 51.0 while the rest of the euro zone posted a “solid expansion in output”. New orders decreased for the ninth month in a row with services joining manufacturing in contraction territory for the first time in three months. Employment fell faster than in January with a slight rise in services unable to compensate for a reduction of the workforce in manufacturing. The contrast (of France and Germany) with the rest of the euro area – fastest increase in five months – is once again striking. The above-average increase in input prices was the fastest since April 2023, pushing up output inflation to its highest in 10 months. Optimism for the year ahead dipped to a three-month low on weak(er) readings in Germany and France. Strong confidence was seen in the rest of the euro area.
The market reaction is a kneejerk one with the euro slipping from EUR/USD 1.05 area to an intraday low of 1.046 before paring losses to 1.048. German yields are down between 4.3 and 5.1 bps. The PMIs indeed disappointed on face value but there’s more than meets the eye. The apparent non-stop outperformance of the euro area ex. France and Germany is an important silver lining. Elevated & rising price pressures should also have protected the downside in yields (at least the front end) since it’s supporting ECB board member’s Schnabel’s case this week for a pause in the rate cutting cycle after March. The slight PMI miss therefore feels as markets looking for any excuse to hedge ahead of the German voting weekend. We expect a fiscal impulse to come from whatever coalition that eventually emerges. But the much-needed swiftness does depend on the outcome with a GroKo (CDU/CSU + SPD) offering the best chance for speedy action. Next is the Kiwi coalition (CDU/CSU + Greens), followed by the three-way Kenya coalition (all of the above parties). The performance of the far-right AfD, which is barred from joining any federal coalition, is a key risk. US PMIs disappointed to the downside with services unexpectedly dipping into contraction territory (49.7). Manufacturing improved to 51.6. US yields and the dollar dip in a first reaction.
News & Views
The Czech aggregate confidence indicator rose slightly (0.4 points) to 97.8, but subcomponents showed a divergent picture. Consumer confidence declined for the third consecutive month from 97.0 to 96.6, the lowest level in a year. Consumers expecting the overall economic situation in the country to deteriorate over the next twelve months increased for the third consecutive month, probably due global geopolitical tensions and the potential impact of US tariffs on European economies. Still the number of households assessing current financial situation as worse than in the previous year declined. Aside from today’s data, households are expected to enjoy real income growth and still low employment, which should support consumer demand. Contrary to mediocre consumer sentiment, business confidence improved to the best level since April 2023. Sentiment improved in trade, construction and even slightly in industry. However, conditions in the domestic industry remain poor, well below historic averages. The Czech koruna recently trade rather resilient with EUR/CZK holding near the lower end of the 25.00/25.45 trading range (25.08).
• The UK February composite PMI signaled another marginal rise in UK private sector output (50.5 from 50.6). Higher levels of service sector activity (51.1) helped to offset a solid reduction in manufacturing production (output 47.4 from 49.2). Sales pipelines remained subdued as total new work decreased for the third month running and at the fastest pace since August 2023. Private firms indicated a further steep decline in staffing numbers (sharpest since Nov 2020), largely in response to higher payroll costs and weak demand. Strong wage pressures meanwhile contributed to the fastest increase in average cost burdens for 21 months. S&P also commented that “The lack of growth alongside rising price pressures points to a stagflationary environment which will present a growing dilemma for the Bank of England”.
