In Europe, PMI Green Shoots Seen As Head Fake, While No-Deal Brexit Now Foregone Conclusion

There was good news and there was bad news out of the EU on Thursday.

The good news is, PMIs surprised broadly to the upside.

Activity picked up in France, where the manufacturing sector unexpectedly returned to expansion. The flash read on the IHS Markit factory gauge was 51 for August, ahead of estimates (49.5) and up from 49.7 in July. New orders printed 51.6, the highest in nearly a year. Services came in better-than-expected too, printing 53.3 versus 52.5 expected. The composite index hit 52.7 in August, up from from 51.9 last month.

More broadly, the flash read on the Eurozone manufacturing gauge was 47, also better than forecast and the composite index was a solid beat at 51.8 versus the 51.2 consensus was looking for.

The numbers for France were a positive development, to be sure. “French private sector businesses posted another solid increase in output during August”, IHS Markit’s Eliot Kerr said, adding that “in contrast to its peers, economic growth in France has remained solid and the latest set of PMI figures only add weight to the argument that this outperformance is likely to continue in the third quarter”.

Speaking of France’s “peers”, PMIs out of Germany were better than estimates too, although that’s a low bar. The manufacturing gauge for the world’s fourth-largest economy printed 43.6 in August, better than the 43 economists expected. The composite gauge came in at 51.4 (versus an estimated 50.6) and services held up ok at 54.4 against expectations for a 54 print.

Still, the manufacturing sector remains mired in a downturn and there are palpable jitters that services is next, followed by the labor market. It was the eighth straight month in contraction for the manufacturing gauge and new orders fell to 41.6. Another month below the 50 line, and the new orders gauge will have spent a year in contraction.

The accompanying commentary from the releases out of Germany is not particularly inspiring.

“The headline services business activity index has come down a touch but remains indicative of a robust pace of output growth in that sector [but] cracks are starting to appear elsewhere in the services data, with inflows of new work barely rising in August and business confidence at its lowest for almost five years”, Phil Smith, Principal Economist at IHS Markit said. “Manufacturing expectations have also taken a turn for the worse, and are now at a record low”, he added.

The Eurozone economy is trying desperately to avoid a downturn and output broadly deteriorated in the second quarter, with the German economy contracting for the second quarter in four.

The economic malaise, combined with falling inflation expectations, has the ECB on the brink of announcing fresh stimulus, expected at the September meeting.

Thursday’s data is likely to be seen as something of a head fake. Still, anything that’s not terrible news is good at a time when Europe is on the front lines of the global slowdown.

Now for the bad news.

A senior EU official who spoke to Bloomberg on Thursday said talks with UK Prime Minister Boris Johnson suggest a no-deal Brexit is likely. Although that’s “the worst possible outcome”, Brussels is now “planning for it”, the person said, adding that the EU is holding out hope that Johnson can offer “substantive ideas” when he meets with Donald Tusk at the G-7 this weekend.

Later, Johnson described talks with Angela Merkel in upbeat terms, saying he’s “powerfully encouraged”, while reiterating that the UK has to leave the EU on October 31, deal or no deal. “I want to deal. And I think we can get a deal and a good deal”, he said, while speaking with Emmanuel Macron in Paris.

For his part, Macron said that while he “respects the sovereign choice of UK” he also “regrets it”.

Read more: No-Deal Brexit Becomes Base Case For One Bank, Prompting Change To Fed Cut Call