Market Overview

May Purchasing Managers’ Index (PMI) readings for the Eurozone and the United Kingdom were unilaterally disappointing. The leading economic indicators continue to slide towards a possible contraction of the European economy, as composite PMI in the Eurozone was down to 53.5 points from  54.1 points, while the same indication for the U.K. fell to 53.9 points from 54.9 points. Both economies’ manufacturing PMIs continue to slid further down below the 50-point threshold. Any reading below 50 points indicates a contraction of the economy.

The service sector in both the Eurozone and the U.K. is on the expansion side above 50 points, but it is  going down.

The synchronic contraction of both points to a common trend for the economy in Europe. The famous poet Joseph Brodsky, who is buried in Venice, wrote in his Letters to the Roman Friend: “Clever merchant was he – very diligent yet decent // To barter Business did he come, and surely not for this one.” Indeed, European business has become very cautious, as it is tuned into an upcoming recession with contracting demand in production and services. Q1 2023 GDP data for the Eurozone and the U.K. is at the 0.1% level, which may easily drop within the negative zone during the second quarter. So, even sluggish expectations themselves may drag the economy down and become the reason for a slide and not the indication of it.

The same is partially true for the PMIs in the United States with Production PMI down within the negative zone at 48.5 points from 50.2 points in April. Services PMI is fortunately better than expected at 55.1 points, above 53.6 points in April. These numbers are better than for the Old World and could allow some more interest rates increase for the Federal Reserve (Fed).

This worrying indications may cool down hawkish agenda for both Bank of England (BoE) and the European Central Bank (ECB). Meanwhile, Minneapolis Fed President, Neel Kashkari, and St. Louis Fed President, James Bullard, has called on the Fed to raise its interest rates further, even to an unthinkable rate “above 6.00%”.

European currencies reacted promptly with the Euro and the Pound resuming their descend. EURUSD was down from 1.0812 to 1.0780; GBPUSD fell from 1.2430 to 1.2380. Both pairs are seeking to meet their support level at 1.0750 and 1.2340 respectively.

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