The eurozone’s HCOB Services PMI rose to 47.7 in May, beating market forecasts of 46.4. The reading remains below the 50.0 threshold that separates expansion from contraction, indicating services activity is still contracting despite the improved outcome.
The data point suggests a less severe downturn than expected for the month. Markets will weigh whether the higher-than-forecast print marks a tentative stabilisation in the services sector, even as the index continues to point to shrinking output.
Persistent Sector Weakness And ECB Policy Outlook
The Eurozone services sector data for May showed a reading of 47.7, which indicates the sector is still contracting. While this was better than the 46.4 that was forecast, we must remember that any number below 50 signifies a shrinking economy. This “less bad” news may cause a short-term relief rally, but we see the underlying weakness as the dominant factor.
This persistent contraction, even if moderating, puts significant pressure on the European Central Bank. With Eurozone inflation recently cooling to 2.4% in May, these weak growth figures build a stronger case for the ECB to cut interest rates in the near future. We believe the market will increase its bets on a rate cut occurring at the ECB’s meeting next month.
Equity, Currency, And Rates Positioning
For our equity positions, we will view any upward movement in indices like the Euro Stoxx 50 as a selling opportunity. We plan to buy put options on these rallies, as the fundamental economic picture does not support a sustained move higher. This pattern is reminiscent of late 2022, when brief rallies on better-than-feared data were quickly followed by declines reflecting the broader economic reality.
In the currency markets, this data weakens the outlook for the Euro, especially relative to the US dollar where recent data showed the ISM Services index holding firm at 53.8. This divergence in economic performance supports a weaker EUR/USD exchange rate. We will be looking for opportunities to build short positions in the Euro through options, anticipating a move towards the 1.06 level in the coming weeks.
Regarding interest rates, derivatives tied to the Euribor are now more attractive. The market has been pricing in ECB rate cuts, and this PMI figure solidifies that expectation. We will be positioning to benefit from falling short-term interest rates across the Eurozone.
