At least the PMIs beat — is what the optimists can say on Friday, as global markets were in a tentative mood after China closed a US consulate.
Gauges of private sector business activity in Europe bested expectations and broadly returned to growth, flash readings for July showed.
At the European level, both the manufacturing and services gauges came in ahead of consensus, pushing the composite index to a big beat at 54.8.
Although these are the first expansionary prints since February, they came with myriad caveats, as you might imagine.
Most notably, the color around the labor market had a tenuous feel. “Although the drop in outstanding business was smaller than witnessed in prior months, a resulting surfeit of capacity relative to order books prompted many companies to continue to reduce staffing numbers”, IHS Markit said. “Headcounts consequently fell for a fifth straight month”.
The result: a rate of job cuts that is still the swiftest in seven years despite improvement versus the crisis levels seen in recent months.
“Job losses remained especially severe in the manufacturing sector where, besides the prior three months, the rate of job cutting was quicker than at any time since 2009”, the release goes on to say.
Things are less onerous in the services sector. Both Germany and France posted big beats on their respective services gauges, although manufacturing prints were more subdued.
“July’s PMI registered firmly in growth territory and well above expectations, in a clear sign that business conditions are improving across Germany as activity and demand recover”, Phil Smith, Associate Director at IHS Markit, remarked. “However, one of the main concerns remains the labor market, and the ongoing cuts to manufacturing jobs in particular, with July even seeing a slight acceleration in factory job losses”.
Obviously, Europe is still set to log an egregious contraction in overall output in Q2, just like almost every economy worth mentioning across the globe. And caution on the outlook abounds.
“The data add to signs that the economy should see a strong rebound after the unprecedented collapse in the second quarter”, Chris Williamson, Chief Business Economist at IHS Markit, said.
“The concern is that the recovery could falter after this initial revival”, he added, cautioning that “firms continue to reduce headcounts to a worrying degree, with many concerned that underlying demand is insufficient to sustain the recent improvement in output”.
That is the same concern that haunts the US, where new lockdowns have prompted some business owners to throw in the towel, and permanent closures are piling up.
European leaders this week struck a landmark accord seen paving the way for the region’s recovery alongside ongoing support from the ECB. The fiscal package includes hundreds of billions in grants and low-interest loans, and the facility is jointly guaranteed, a feature widely heralded as a historic step towards closer budget integration.
This has led to broad optimism around the euro. Generally speaking, the re-opening process has been smooth, especially compared to the US. Some argue the case for EUR assets is now especially compelling.
Still, as the cautious commentary that accompanied July’s preliminary PMIs makes clear, Europe is far from being out of the woods.
