European PMI Data Rise and Create a Twist on a Theme

The manufacturing and service sectors both are showing lift in the Markit PMI framework in February. Manufacturing has been surging bit longer but with its strength this month the services sector has caught up. The diffusion values for manufacturing and services are nearly identical. And each is at the top of its queue of values since 2012. This development makes an interesting policy twist since this strength comes in the face of an ECB policy that has been to wait for growth to broaden and to set aside oil-based inflation pressures. The PMI data this month run somewhat counter to the policy theme for both Europe and for the U.S. where policy not only leans but has been moving the other way.

Europe's manufacturing PMI shows steady increases in its 12-month, six-month and three-month moving averages. The PMI readings have progressed from 52.7 to 53.6 to 54.6, steady and striking gains for the respective period averages. By comparison, the services sector has been steadier at 53.1 for 12-month and 53.2 for six-month with a slightly better 53.7 over three months. But then the services gauge jumped to 55.6 in February from 53.7 in January.

The overall German and French private sector PMI gauges also show improvement with France making more or less steady gains on its period moving averages while Germany exhibits a pop, riding the back of a strong manufacturing sector since its services sector really is not sharing in this revival.

For France, both manufacturing and services show steady gains on the 12-month to six-month to three-month progression. But France also shows a step back for manufacturing in February while services surged in February.

Lots of recent highs
For France, the services sector is at its highest reading since January 2012. For Germany, manufacturing is at its strongest since January 2012. The German overall private sector reading is also at its high on that timeline, the same as for the two EMU private sector gauges as well as the overall EMU reading. That's a lot of strength from this indicator. Of course, only Germany has an unemployment rate low (since the EMU was formed; since German reunification) and many EMU nations are still above their median rates of unemployment since the EMU was formed (a broader timeline than 'since 2012'). So let's give credence to the better data, but let's also keep it in perspective.

Policy crossroads
These revivals are going to help fuel the debate about policy in Europe. Germany is also showing its fastest rising PPI since 2012. But the ECB has been holding back, waiting for growth to take deeper root and to spread while it has set aside that part of inflation that is traceable to oil prices.

Despite this clear revival in Europe, yesterday the OECD reported out a slowing in growth for the OECD area in Q4. So this Q1 speed up in Europe is coming on the heels of a broader OECD area slowdown in GDP growth.

Oil prices are back up on some brave words by the OPEC although recently a slowdown in driving in the U.S. has caused gasoline stockpiles to be higher and has pressured gasoline prices lower. The oil market remains a mish-mash of events with evidence of current slack doing combat with OPEC promises to tighten market conditions further. Although it is difficult to monitor compliance, so far markets have given the OPEC jawboning substantial credibility.

Over there or over here depending on your perspective...
There is also evidence of a growth picking up in the U.S. although in February there is a backing off in the U.S. Markit manufacturing and services gauges for February. Both manufacturing and services have dropped below their respective three-month averages and the service sector reading for February also is below its six-month average. Compared to Europe where PMI standings are high on a timeline from early 2012, in the U.S. the manufacturing gauges' standing is short of being even a top one-third event while services are just strong enough to avoid being a bottom one-third event.

The conundrum deepens
Despite market machinations policy in the U.S. and Europe is moving in opposite directions and each is moving opposite to the PMI trend each region has posted this month! The Fed is literally 'on the verge' of another rate hike while in Europe, where the PMIs are heating, up the ECB is prevaricating. There is considerable policy dissonance in play. In the U.S., the Fed and more recently the Fed Chair have echoed the same chorus of how it is better to move sooner and slower than to delay and have to move policy rapidly in a way that could off-track markets. The Fed is clearly feeling the heat and -hearing the 'footsteps' of inflation - and maybe even hearing what isn't there- since in the U.S. ex-energy inflation really remains at bay. For now it is the ECB that has been outspoken about not reacting to energy inflation to the clear consternation of Germans. The ECB has only one policy goal and that jobs is to keep inflation in check. In the U.S., policymakers have more scatter-shot objectives. As the unemployment rate has fallen by so much, the the Fed seems simply to be running out of patience and is fearful it may have gone too far despite the lack of that sort of feedback from the economy. Inflation still fails to heat up, but the Fed is worried about low unemployment despite all the baggage of the labor market data. At her recent testimony, Janet Yellen quite simply said that the Fed finds that it is the right thing to do to raise rates when resource usage is high because that has tended to spawn inflation. With all that as background, we are back to watching data and second guessing central banks. And this month's PMI data do create a bit of a twist on a theme as policy and data seem to have jumped the tracks in both the U.S. and Europe and are now on a collision course.