Euro manufacturing PMI declined to 52.0 from 52.3 in line with consensus. Given the weakness in China and EM we had expected a larger decline and it seems that the domestic economy so far remains OK.
This is also confirmed by the details, which suggest that domestic demand strengthened slightly in September as the decline in new export orders was a bit larger than the decline in overall new orders.
Despite signs of resilient domestic demand, the details also indicate that the manufacturing PMI will decline further going forward as the order-inventory balance weakened in September due to a rise in stocks of finished goods.
The service PMI was weaker than expected but remained at a high level of 54.0. For services, the future business expectations continued its downtrend to 60.5 from a peak at 64.8 in February. On the other hand, the incoming new business index remained around a high level of 54.0.
Although the PMIs were better than feared, overall they confirm our expectation of the weakest GDP growth in five quarters in Q3 15. Our lower GDP growth forecast reflects an expectation of a spill-over to sentiment from the weakness in China and emerging markets, while there will also be headwind to exports from the slowdown in the Chinese manufacturing sector and the yuan deprectiation.
The PMIs released today do not change our expectation that the ECB will stick to verbal intervention until December and possibly even until Q1 16. However, in December or March we expect the ECB to once again lower its inflation projection and also announce that it will extend it QE purchases beyond September 2016.
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