The PMI release is one of the most-watched pieces of economic data in the financial markets. Released monthly, it reveals the expansionary or contractionary nature of an economic sector. Calculated in all developed countries, the release has particular importance for traders wanting to know the implications on the main currencies part of the Forex dashboard.
Yesterday the IHS Markit Eurozone PMI rebounded from previous lows. So what does this mean for markets? Let us think about what the PMI data means in the first place.
Interpreting Eurozone’s May 2020 PMI
The Eurozone PMI has two components – services and manufacturing. Because most of the Eurozone economies are service-based (i.e., services have a bigger chunk of the national GDP), PMI Services tends to have a bigger impact on financial markets.
The PMI’s line in the sand is the 50 level. Any print above it shows the sector’s expansion. Below 50, it shows contraction.
In April, the PMI fell to incredible levels – 12.0 for Eurozone Services and 18.1 for Eurozone Manufacturing. As a comparison, during normal economic times, the PMI rarely contracts below 45 or expands above 55. When that happens, the central bank’s economic committees consider the economy as falling into recession or overheating – ultimately leading to a shift in central banks’ thinking.
While both services and manufacturing sectors jumped to 28.7, and 35.4 respectively, they still show contraction ahead.
However, investors celebrated the bounce by bidding the Euro across the board. Just after the release, the EURUSD made its way through the 1.10 level, while the EURJPY and EURGBP crosses noticed substantial advances too. The Euro however gave back some of the gains by the end of the trading day, as investors realized the true nature of the release.
IHS Markit also offers another interesting view of May’s data, that further explains the enthusiasm of pro-Euro investors. It showed the Eurozone PMI evolution in comparison with the COVID-19 containment index. In other words, we know that the PMI cannot show positive economic data while countries are in lockdown (contained).
As a result it followed the containment index closely, the jump in the PMI numbers implies that by the end of the year, the services and manufacturing sectors are back closer to the 50 level. As investors trade for future returns, it comes as no surprise that optimism prevailed, despite overall bad PMI data.