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Thursday, January 23, 2014 1:35 PM

Eurozone PMI Strengthens, Except France; Germany-France Yield Spread Widens; Where to From Here?

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The Eurozone composite PMI hit its highest since June 2011, but it did so with France still in contraction as noted by the Markit Flash Eurozone PMI.

The euro area private sector economy grew for a seventh consecutive month in January, according to the flash Markit Eurozone PMI® , with the rate of growth accelerating to the fastest since June 2011. The headline PMI (which tracks output across both manufacturing and services) rose from 52.1 in December to 53.2

New orders across the euro area rose for a sixth successive month, albeit growing at a rate unchanged on December. Backlogs of work also continued to fall marginally, suggesting that the level of demand, although rising, remain s insufficiently strong to enable companies to build up a pipeline of orders to fall back on if demand weakens. Employment was consequently trimmed slightly again, having stabilised in December, as companies remained uncertain about expanding capacity. Employment has not risen since December 2011, though the trend in the rate of job losses has eased considerably over the past year.

Selling prices also continued to fall, highlighting the fragility of demand, and have now declined continually over the past two-and-a-half years. The latest reduction was only modest, however, and the weakest since May 2012. The easing in the rate of decline reflected in part the need to pass higher costs on to customers.

Growth in Germany hit the highest since June 2011. The strong pace of expansion was fuelled by a seventh consecutive monthly rise in new business. Manufacturing output surged at the strongest pace since April 2011, but services activity growth picked up only marginally on December. Employment in Germany rose only modestly as a result, the rate of job creation sliding compared with December. Staffing levels have nonetheless now risen in each of the past three months.

In France, output fell for a third successive month, through the rate of decline eased to the slowest seen over this period. Rates of decline eased in both manufacturing and services. New orders likewise fell at a reduced rate, but the pace of job losses accelerated slightly.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

The upturn in the PMI puts the region on course for a 0.4-0.5% expansion of GDP in the first quarter, as a 0.6-0.7% expansion in Germany helps offset a flat-looking picture in France. Elsewhere across the region growth has improved to its fastest since early-2011, meaning the periphery is showing clear signs of starting 2014 on a firm footing. “However, while gathering pace, the upturn remains fragile. Companies cut employment again, and selling prices continue d to fall amid still-weak demand. Deflationary forces are clearly a concern in many countries . The growth disparities are also a persistent concern . We are seeing growth being led by Germany, especially its surging manufacturing sector, while France looks likely to act as a drag on the eurozone recovery for some time.”
France-Germany Yield Spread Widens

Bloomberg reports France-Germany Yield Spread Widens as French Growth Trails Peers
The extra yield investors demand to hold France’s 10-year debt over similar-maturity German bonds increased for a third day on signs the French recovery is trailing its regional peers.

The yield difference, or spread, between benchmark 10-year French and German bonds increased one basis point to 70 basis points after touching 71 basis points, the most since April 3 on a closing-market basis.

“We are back to levels which are pointing to the relative performance of France versus Germany,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. “Unless France improves its economic and fiscal performance, it will be very difficult to see the spread tightening further. Today there was supply in France and therefore there’s been some concession in the market.”

French Manufacturing

A gauge of French manufacturing output, based on a survey of purchasing managers, showed the industry failed to expand for the 30th month in January. A separate Markit Economics report showed an index of German manufacturing activity rose to the highest in more than 2 1/2 years. Markit’s composite gauge of euro-area manufacturing and services output rose to 53.2, from 52.1 in December.
Where to From Here?

Germany continues to expand, France doesn't. Moreover, and on a "where to from here basis" Spain is better off than France, as in "closer to the bottom".

Unlike Markit economist Chris Williamson, I do not believe Germany can continue to pull the Eurozone economy forward much longer.

I will explain the above ideas in detail in a subsequent post.

Mike "Mish" Shedlock

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