July PMIs: Strong July readings from a world that no longer exists
The July flash PMIs delivered a clear upside surprise. Both the eurozone and the UK returned to expansion, confounding our expectation that renewed tensions in the Middle East would push activity back into contraction.
The eurozone composite rose to 51.9 and the UK to 52.1, while manufacturing output accelerated sharply in both economies. On the surface, the data point to resilient growth and easing inflation pressures. The more important question is whether they describe an economy that still exists.
The timing is crucial. Both surveys were conducted between 9 and 22 July, before Brent crude surged above $100 and before the latest escalation in the Middle East fundamentally altered the energy backdrop.
The moderation in input-cost inflation reflects lower fuel prices during much of the survey period, while improving business confidence was supported by easing geopolitical tensions. S&P Global's own commentary reaches the same conclusion, warning that renewed energy disruption and higher oil prices could quickly reverse the improvement seen in July.
Our preview therefore proved too pessimistic for July, but it was premature rather than directionally wrong. We expected businesses to begin reflecting the consequences of sustained higher energy costs, renewed supply disruption and weaker confidence. Those effects largely occurred after the surveys had closed.
The PMIs therefore capture the final weeks of a lower-oil environment rather than the conditions today.
The market reaction reinforces that interpretation. Despite the sizeable upside surprise, neither the euro nor sterling mounted a meaningful rally. Had investors believed these surveys fundamentally changed the outlook for growth and inflation, both currencies should have responded positively. For good reason, markets look through the data, recognising that they describe an earlier macro environment.
At the same time, today's pricing reflects a world of triple-digit oil, renewed shipping disruption and a more hawkish central-bank outlook.
That leaves the August PMIs and the next inflation releases carrying far greater significance. They will be the first surveys capable of showing whether the renewed energy shock begins feeding into business confidence, pricing behaviour and activity. If Brent remains above $100, the July PMIs will be remembered as a snapshot of the economy just before the macro regime changed.