UBS: Eurozone - Super-strong flash PMIs

The Eurozone manufacturing PMI rose by a moderate 0.3 points to 55.5 (consensus: 55.0), but Services PMIs jumped by 1.9 points to 55.6 (consensus: 53.7), boosting the Composite PMI by 1.6 points to 56.0 (consensus: 54.3). The PMI details indicate strong employment dynamics, healthy (export) orders, increasing backlogs of work and growing price pressures. According to Markit, the February flash PMI, if sustained in March, could point to Q1 GDP growth of 0.6% q/q.

We acknowledge upside risk to our own Q1 growth projection of 0.4% q/q, 1.7% y/y. Two weeks ago, we had already argued that the latest inflation and growth data would embolden the hawks, but today's PMIs strengthen this notion even more. We expect the ECB to taper QE as of January 2018, with a decision likely due on 7 September. We project inflation to rise to a temporary peak of 2.1% y/y in April (from 1.8% in Jan).

Significant increases in both Germany and France

Strength was broad-based across countries. Germany's Composite PMI rose to 56.1 (January level 54.8; February consensus 54.8) – the highest level since April 2014 – while France's Composite PMI increased to 56.2 (from 54.1 in January, consensus 53.8) – the highest level since May 2011 – with both manufacturing and services contributing to this increase in both countries. New export orders in Germany rose at the fastest rate in 3 years. It will be interesting to see whether today's surge in the German PMI will be confirmed in tomorrow's February ifo index. The ZEW index declined in February.

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