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Euro zone service PMI in Jan highlights the bloc’s disappointing start to 2016

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 3, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The euro zone services PMI released today showed a drop in the index in January indicating that the economy in the bloc has indeed started the year on a weak note. With prices remaining low deflationary pressures are mounting raising concerns for the ECB which is already worried about inflation figures which has stayed too low for too long.The Services PMI for January came in at 53.6, unchanged from the December’s reading. Manufacturing sector has not fared will as evident from the Composite PMI. Composite PMI came in at 53.6.

    Chris Williamson, chief economist at Markit observed that rrowth of activity, order books and employment have all lost momentum. Average prices charged for goods and services also dropped at the fastest rate since last March underlining the rising defationary pressure in the bloc. It is quite evident that both inflation and growth did not manage to pick up momemntum despite the ECB’s QE programme and other easing measures like negative rates. This has led many analysts to question the impact of the central bank’s easing measures. Economists feel the easing tools are either insufficient or the monetary policy has a whole is ineffective.

    Williamson considered the readings to be disappointing. He pointed out that the readings indicate the weakest expansions seen over the last one year raises the possibility of further stimulus from the central bank.

    The European Central Bank (ECB) in January had kept its monetary policy unchanged. Rates were held steady at 0.05 per cent and at the post meeting press conference ECB supremo Mario Draghi stated that rates can be expected to "stay at present or lower levels for an extended period of time". He held that there that downside risks were increasing again. The plunge in the oil price to below $30 per barrel means that CPI inflation could average as little as 0.2 percent this year – well below the ECB's current forecast of 1 per cent. The central bank expects inflation to remain at very low or negative levels in the coming months. It will pick up only later in 2016. Draghi therefore signalled the need for more stimulus measures and that monetary policy stance will be reassessed in its next meeting on the back of rising downside risks. He noted "It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in March".

    PMI shows poor sector performance in euro zone’s largest economies

    Study of the services PMI figures released for the leading economies of the bloc show disappointing growth in the services industry in Germany, France and Italy. Services PMI in Germany stayed unchanged at 55.4 in January. Services PMI in Germany touched a three month low in January. Though activity, new orders and employment growth all slowed, the markets can draw heart from the fact that business sentiment rose to a five-year high. Oliver Kolodseike, a Markit economist added ‘Output rose to the smallest extent in three months, the underlying rate of growth was robust overall, helped by a further sharp rise in new business.”

    While in France services PMI fell below estimates to 50.3 due to tepid demand. However the sector performed slightly better than in December when it was noted to have contracted. France saw new orders in this sector rise at ‘a below-trend pace’. Jack Kennedy, senior economist at Markit however did provide some hope stating that ‘An improvement in service providers’ future expectations to a five-month high offered some modest encouragement’. He was however quick to warn that there were not too many signs to suggest the services sector will manage to overcome its sluggish performance quickly given the ‘fragile business climate.’

    Services sector in Italy slowed considerably with service PMI in January dropping to 53.6 from 55.3 in December, below the expected reading of 54. Growth in new business and employment slowed down. However, business confidence for the year-ahead rose to the strongest level since May 2011.
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