EMU CommentAnother month with the PMI surprising to the upside

The eurozone flash Composite PMI surprised (again) to the upside, with the increase to 58.6 (from 58.1) setting a new high since 2006 and maintaining the impression of a robust economic expansion into 2018. Manufacturing sentiment decreased somewhat, but from a record high in December, probably affected by further EUR strength and actual manufacturing production lagging upbeat sentiment. Furthermore, surely there is a limit to how optimistic eurozone manufacturers can get given subdued global prints in recent months (see graph). The service PMI index showed unexpected strength, probably supported by higher consumer confidence and continued labour market strength. That is likely to have outweighed actual retail sales growth failing to strengthen in recent months. German and French Composite PMIs were fairly stable in January, at 58.8 and 59.7 respectively, so the increase in the eurozone PMI is probably due to non-core countries.

The PMI should lend further support to the ECB’s expectation of the strong economic expansion continuing. Furthermore, today's PMI revealed that employment growth hit a new record pace since 2000 and PMI output prices rose markedly to 54.6, a new high since 2011 (see graph). The latter further supports our view that core inflation should rise more visibly in the months to come. While, the ECB might recognise those developments, we do not expect the central bank to deliver changes to monetary policy or guidance at the policy meeting tomorrow, as the stronger EUR is likely tp limit the ECB’s appetite for signaling a move toward less expansionary policy. The March policy meeting is likely to be much more interesting in that regard. The PMI supports our view that the ECB will probably become more hawkish this year than generally expected.