Sterling Falls Against the Euro Following Soft PMI Data

Sterling dove against the Euro on the big services PMI miss, which fell to 56.5, down from 59.5 in April, the biggest month-to-month drop in four years and is the weakest level in five months. The UK composite PMI dove to 55.8 from 58.4. Markit estimates that the PMI data points to GDP growth of 0.4% in quarterly terms, raising doubts about ability of the economy to rebound convincingly from early-year weakness. European data was in line with forecasts but the solid unemployment rate gave the currency a boost.

The UK Markit services PMI much weaker than expected in May in falling to a headline reading of 56.5, down from 59.5 in April. This is the biggest month-to-month drop in four years and is the weakest level in five months, though still above the historical average which is 55.2 and marking the 29th successive month of expansion in the sector. The new business component also fell to a five-month low, but also posted its 29th month of growth. The one-year outlook improved slightly from April with firms reporting that the outcome of the early May general election removed uncertainties.

On the continent, Eurozone retail sales rose 0.7% month over month in April, in line with our forecast. The March number was revised up to -0.6% month over month from -0.8% month over month, reported initially, but still left the three months trend rate at a meagre 0.3%, down from 0.7% in the three months to March and versus rates of above 1% in January and February. Still, the annual rate moved higher to 2.2% y/y and the robust numbers confirm that consumption is a main driving factor of the recovery in the Eurozone, helped by the low inflation environment, which is lifting real disposable income, but also the stabilization on the labor market.

Eurozone unemployment fell to 11.1% in April, the lowest rate since March 2012. March 2015 numbers were revised slightly lower to 11.2% from 11.3% reported initially. The labor market continues to improve as growth stabilizes, although disparities between countries remain very high, especially for those under 25. Eurozone youth unemployment was a staggering 22.3% in April, with rates ranging from 49.6% in Spain to 7.2% in Germany.

Eurozone services, composite PMIs revised up, but still down on April. The Spanish services came in lower than expected, falling to a still very strong 58.4 from 60.3 in the previous month. The Italian reading also came in weaker than expected at 52.5, down from 53.1. Final French and German numbers were revised higher, however, which left the overall Eurozone services PMI at 53.8, versus an initial reading of 53.3, but still down from 54.1 in the previous month.

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