Eurozone: Strong PMIs won’t stop an extension of the QE program - Danske Bank

Pernille Bomholdt Henneberg, Senior Analyst at Danske Bank points out that the preliminary Eurozone PMI numbers were strong but still the European Central Bank will extend the purchase program. 

Key Quotes: 

“The euro area PMI figures for October were strong, and in line with the latest signals they suggest that GDP growth in the euro area in H2 16 will be stronger than initially expected after the UK’s vote to leave the EU. The manufacturing PMI increased to 53.3 in October from 52.6 in September and is hence at the highest level since April 2014. The service PMI also rose and was 53.5 in October from 52.2 in September, which is the highest level since January this year. The composite PMI new orders index, which is a good leading indicator for economic activity, points to euro area GDP growth close to 0.5% q/q in Q4. The figures are overall likely to be slightly better than the ECB’s previous expectations of ‘a continued moderate but steady recovery’, thereby supporting the hawkish members’ view that more easing is not necessarily needed.

“In our view, it will take a very long time before the stronger economic activity results in strong upward pressure on euro area wages. This should keep core inflation subdued and implies the ECB in our view will not conclude it has seen ‘a sustained adjustment in the path of inflation’ hence it should extend its QE purchases beyond March 2017. The ECB believes wage growth will pick-up significantly in coming years, but although the unemployment rate continues lower, we expect the trend in wage growth to be much slower than the ECB projects – especially as long as the German wage pressure remains modest.”