We’ve been writing about improving fundamentals in Western Europe for months now, and today’s PMI numbers for September confirm that this positive trend is still in motion. The chart below shows the directional moves on a sequential basis. The take-away here is that Eurozone PMI (composite) improved month-over-month and importantly remains above the 50 level that signals expansion. For Germany and France—the two largest economies in the Eurozone—September showed an improvement in manufacturing and services short of an unexpected decline in German services to 52.2 from 54.1 in August, according to Reuters.
Rising unemployment remains a headwind for Europe into year-end and 2010 and we expect the positive rate of change for fundamental metrics (like PMI) to slow over the next two quarters. Eurozone unemployment, which gained 10bps to 9.5% in July and could run into the mid 10% range next year may well erode the gains we’ve seen in business and consumer confidence over the last months and dampen consumer spending.
Inflation, an additional potential dark cloud on the horizon, has begun to pick up but is still running negative at -0.2% in August year-over-year in the Eurozone (Eurostat). We are looking for inflation to ramp on an annual compare in Q4 due to the manic fall in energy costs in October-December of 2008. As a critical piece of the puzzle we’ll be monitoring the sequential change of energy prices and their impact on the region’s (specifically Germany and France) industrial and manufacturing base. There are no signs of slowing there yet however (based on what lagging data is available), with Industrial new orders in the Eurozone at +2.6% for July, trending comfortably upward from June’s reading of +4%.
We bought Germany via the etf EWG on 9/21. The country’s most present catalyst is regional elections this Sunday, which we’ll be writing on in greater depth. We’re currently short the UK via EWU and the Pound via FXB.
Matthew Hedrick
Analyst
