Summary:

• Eurozone flash PMI slips for the second consecutive month, at a 6-month low
• Eurozone flash composite output index in July was at 55.8, compared to 56.3 in July
• Eurozone flash services PMI at 55.4, unchanged
• Eurozone flash manufacturing PMI at a 6-month low at 56.9
• Germany and France private sector activity weaker in July

In what could be a sign that the growth momentum in the eurozone could be slowing, Markit’s flash Purchase managers index (PMI) surveys signaled a slowdown for the second month in a row for July.

Still, despite the slowdown, activity remains at one of the strongest paces of expansions in over six years. Data from IHS Markit showed that the eurozone’s composite output index slowed for a second consecutive month. It was down from 56.3 in June to 55.8 in July.

(Click on image to enlarge)

Eurozone Flash PMI’s and GDP expectations (Source: IHS Markit)

Despite the headline weakness, data showed that other components such as new orders remained at a 6-year high. This showed that growth could eventually pick up in the coming months. Job creation was also seen getting a lift with companies expected to expand the workforce in line with growing demand.

According to the data from Markit, there were also signals that the employment sector was in for one of the biggest expansions in recent decades. Most of the employment gains from factories. The strong optimism in the labor market also suggested that companies expected to see future business conditions improving.

The average price of goods and services showed a slower pace of increase. This comes after a weak pace of increase just the month before. The price of goods and services is expected to show that inflation in the eurozone was likely to remain sluggish.

Q3 GDP in the eurozone is expected to rise 0.6%

Based on the flash estimates, the data was seen to be consistent with the GDP rising at a quarterly pace of 0.6% after economic activity was seen to expand at a pace of 0.7% in the three months ending June.

However, with still another three months to go to get a complete picture on the third quarter GDP, the data did not impact the market much. In the eurozone, bond yields, especially from Italy and Portugal fell to one of the lowest levels on Monday. This was after the flash PMI’s were released.

The weaker than expected flash PMI’s suggests that despite the ECB’s willingness to unwind its QE purchases, it could be a rather slow process. At the June monetary policy meeting, the central bank said that bond purchases would continue until the end of December 2017, running its course.

Any tapering announcement which is expected to be coming out from the September policy meeting could be seen being implemented not before January 2018.

Besides the soft PMI’s, data last week also showed that the private sector activity in Germany grew at a slower pace in the month of July. Even the French business activity showed signs of cooling, falling to a 6-month low.

Despite the apparent weakness in the flash PMI’s, optimism in the recovery of the eurozone’s economy remains firmly entrenched. This gives the basis for further strengthening of the common currency which has quickly reversed the trend.

With the markets expecting that the next policy decision from the ECB will be to tighten monetary policy than continue with the current easy policy, the EUR/USD is likely to remain elevated over the coming months.