European PMIs: Time To Reevaluate Expectations

European PMIs

As the second-quarter earnings season gets underway, more and more companies are reporting that they are facing logistics and supply issues.

This has caused an increase in prices for their raw materials, which many are passing on to their customers. Several companies have stated that they expect prices to continue to rise for the remainder of the year. However, others have refused to provide guidance due to uncertainty.

PMIs give us some insight as to how inflation is evolving and could trend in the future, as businesses evaluate their purchasing strategy.

Expectations of higher prices could lead businesses to “front load” their inventory buying, to lock in better prices. That could contribute to a shift in the trend of expectations.

Reaching the top

Until now, a lower current assessment largely characterized PMIs, but with optimism that things will improve. Nonetheless, at a certain point, those expectations will be met, and we ought to see a “leveling off” of PMI data.

However, the recent concerns over the spread of covid variants have put businesses on edge. Most businesses in their reports cite uncertainty about the next six months, regarding the pandemic. Adding to that, several authorities across Europe refused to rule out a return of curfews and even lockdowns should case numbers get worse.

So how is this going to affect the market?

The market reaction

All of that adds up to expectations that PMIs will be at best even with June’s numbers.

We should also remember that tomorrow’s reports are the “flash” results; they are preliminary and subject to modification later in the month.

However, the market appears to be pricing in some pessimism for the figures. This provides an opportunity for a positive reaction in stocks and in the euro if there is a beat of expectations.

If the data is disappointing, it could lead to increased pessimism over the weekend. We could see a weaker euro and a resumption of the downward trend in European equities, particularly in Germany.

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