Eurozone Manufacturing Contracts Less Than Expected In June

A key measure of manufacturing output in the eurozone rose in June to the highest level in sixteen months amid the continent wide recession that has seen unemployment, specifically of the younger population, rise to record levels.

Spain and Italy both showed notable strength in June the manufacturing sectors in each company improved sharply from May.

Best in 16 Months

The broad Eurozone Manufacturing PMI rose to 48.8 in June from 48.3 in May, beating the economist estimate of 48.7 as well. Although the figure remained below 50 and still signaled contraction in manufacturing across the continent, the figure marked a 16-month high in June but it has been a whopping 22 months since the PMI signaled expansion in manufacturing across the eurozone as the debt crisis and ensuing austerity measures have limited growth.

Notably, Spain's Manufacturing PMI improved to a 26-month high of 50.0 in June from 48.1 in May. Economists were expecting a reading of 48.5, showing significant strength in this figure. The 26-month long slump in manufacturing coincided with the bursting of a massive property bubble in Spain which morphed into a full-fledged banking crisis that saw many of the nations largest banks forced to submit for federal bailouts. Spain's economy has seen some signs of life in recent times and this figure reinforces the thesis.

Also, Italy's manufacturing sector improved more than expected in June. Italy's Manufacturing PMI, although still showing contraction, improved to a 23-month high of 49.1 in June from 47.3 in May, beating economist expectations of a reading of 47.8.

German Weakness

Despite gains in the peripheral nations which have borne the brunt of the debt crisis in Europe, German manufacturing, which has been the most resilient economy in the currency bloc, disappointed in June. The German Manufacturing PMI slipped to 48.6 in June from 49.0 in May, worse than the expected 48.7. Meanwhile, French manufacturing was roughly in line with consensus.

The weak German figure is a scary sign for the entire eurozone figure, as the country is the largest economy in the zone and represents the lone bastion of strength and fiscal responsibility in the currency bloc, at least among the large economies. The German economy made up 20.5 percent of eurozone GDP in 2012, dwarfing the next largest country, France, at 15.7 percent. German GDP grew 0.7 percent in 2012 compared to the drop in the broad eurozone of -0.3 percent.

Markets Gain, Germany Lags

Equity markets in the eurozone rose in early trade led by stocks in Spain and Italy. The Spanish Ibex Index rose 1.54 percent and the Italian FTSE MIB Index gained 1.68 percent as both countries posted better than expected manufacturing data for June. Meanwhile, the French CAC 40 Index rose 0.88 percent while the German DAX lagged, gaining only 0.51 percent.

The EUR/USD gained on the news and climbed to a session high above 1.3050 before retreating to the current 1.3031. The euro also gained against the yen and the pound while Spanish and Italian 10-year bond yields erased earlier gains as prices rallied on the benchmark bonds.

BY Matthew Kanterman