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PMI Divergence to Widen US-EU Rate Gap
Eurozone services in contraction, UK flash tests slowdown, US holds firm. The divergence fuels rate differential trades, lifting USD and yields. Hungary rate decision due.
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Tuesday's flash PMI releases for the euro area, UK and US will give markets the first broad growth reading since the Fed and ECB meetings. Consensus points to the US holding above 50. The euro area stagnates. The UK wobbles. That divergence is the main driver of recent rate differential trades.
Eurozone manufacturing is expected at 50.9, down from 51.6. Services should improve to 48.8 from 47.7, still in contraction. The bounce partly reflects a statistical correction after French data hit unusually low levels in May. Consumer confidence ticked up to -17.7 from -19.0, well below pre-war norms. The survey period ended June 19. The drop in oil prices from the US-Iran deal may not be fully reflected. For the ECB, the data reinforces the view that growth is too weak to justify another hike. President Lagarde's cautious comments last week support that.
UK services slowed sharply in May to 49.3 from 52.7. The June flash will test whether that is a one-month blip or the start of a deeper slowdown. A second contraction would build pressure on the Bank of England to signal a cut. Input costs from energy remain elevated. The lag between lower oil and activity data means the June print may not yet capture the relief from cheaper crude.
US PMIs are expected to stay firmly in expansion. Manufacturing is seen at 54.6, down slightly from 55.1. Services should tick up to 51.0 from 50.7. That combination supports the narrative of US economic resilience that new Fed Chair Kevin Warsh leaned into at his first meeting. Markets have priced in a higher probability of a rate hike after Warsh's hawkish tone. Expectations for an ECB move have been scaled back.