The headline reading is the highest since November 2018 as it reaffirms stronger inflation pressures, which could owe to some part in base effects and also higher input cost inflation across the region/globe.
“Eurozone manufacturing continues to grow at a rate unprecedented in almost 24 years of survey history, the PMI breaking new records for a third month in a row. Surging output growth adds to signs that the economy is rebounding strongly in the second quarter.
“However, May also saw record supply delays, which are constraining output growth and leaving firms unable to meet demand to a degree not previously witnessed by the survey.
“High sales volumes are consequently depleting warehouse stocks and backlogs of uncompleted work have soared at a record pace. While these forward-looking indicators bode well for production and employment gains to persist into coming months as firms seek to catch up with demand, the flip-side is higher prices. The combination of strong demand and deteriorating supply is pushing up prices to a degree unparalleled over the past 24 years.
“The survey data therefore indicate that the economy looks set for strong growth over the summer but will likely also see a sharp rise in inflation. However, we expect price pressures to moderate as the disruptive effects of the pandemic ease further in coming months and global supply chains improve. We should also see demand shift from goods to services as economies continue to reopen, taking some pressure off prices but helping to sustain a solid pace of economic recovery.”
This follows the Ifo report earlier. I’m bolding the comments which are tied to inflation, as that may be something for the ECB to consider in case price rises stay the course.
more to come
Despite a bit of a miss on the headline estimate, this is still a strong report with overall business activity expanding at its quickest pace on record – reflecting strong growth in both services and manufacturing activity as the UK reopening gathers pace.
This is an encouraging report as it reaffirms some pickup in services activity in the euro area as economies start to get back on their feet and move on from virus restrictions. The manufacturing sector is stalling a little but is keeping at robust levels overall.
“Demand for goods and services is surging at the sharpest rate for 15 years across the eurozone as the region continues to reopen from covid-related restrictions. Virus containment measures have been eased in May to the lowest since last October, facilitating an especially marked improvement in service sector business activity, which has been accompanied by yet another near-record expansion of manufacturing.
“Growth would have been even stronger had it not been for record supply chain delays and difficulties restarting businesses quickly enough to meet demand, especially in terms of re-hiring. The shortfall of business output relative to demand is running at the highest in the survey’s 23-year history.
“This imbalance of supply and demand has put further upward pressure on prices. How long these inflationary pressures persist will depend on how quickly supply comes back into line with demand, but for now the imbalance is deteriorating, resulting in the highest-ever price pressures for goods recorded by the survey and rising prices for services.”
Manufacturers’ sentiment index +21
Service sector index +2 in May (first positive reading since the early months of 2020)
Comments via the report:
Some comments from the report:
On the face of last week’s Bank of England rate decision it was very uneventful. Rates were kept the same & asset purchases the same. Some investors had been hoping for a repeat of the Bank of Canada’s hawkish shift by tapering bonds and bringing forward interest rate hikes. The only dissenter to the on hold narrative was Andy Haldane. However, he is on the way out shortly from the Monetary Policy Committee, so that didn’t register with investors.
Minutes paint a better picture.
However, looking at the minutes the BoE has adopted a more optimistic outlook for the UK economy. They are expecting the country’s GDP to fall by less than forecast back in February, with the low Covid case numbers and success of the vaccine rollout clearly playing a big part in this. Crucially, there is an expectation that the estimated £150 billion of savings that consumers have accumulated over the past 14 months or so will steadily be released into the economy in the months ahead. GDP is expected to rise sharply in 2021 Q2 and to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity. Demand growth is further expected to be boosted by a decline in health risks and a fall in uncertainty, as well as announced fiscal and monetary stimulus.
GBP & FTSE reaction
The GBP responded in a confused fashion with the meeting and chopped around before moving higher sharply this week helped by a very poor NFP report.
The FTSE 100 was far more confident and moved higher on the higher growth forecasts. However, the general sell off in stocks this week has since brought in lower.
June taper?
This look like a June taper can be expected now as there has been two upbeat MPC meetings in a row now.One approach would be to look for suitable technical areas to buy the GBP into the next BoE meeting. The key risk, as always,is on some kind of vaccine resistant COVID-19 variant.
