By Howard Schneider and Jonathan Cable
WASHINGTON/LONDON (Reuters) - U.S. and China manufacturing activity expanded in May, putting the world's two largest economies on a seemingly firmer path to recovery, but a slowdown in euro zone factory growth boosted expectations of policy easing by the European Central Bank.
The Institute for Supply Management said its index of national factory activity rose to 55.4 in May from 54.9 in April, just shy of the 55.5 expected according to a Reuters poll of economists. ISM had initially said the reading came in at 53.2 for May, but that figure was corrected due to an error in applying seasonal adjustments.
A reading over 50 indicates expansion in manufacturing activity.
Financial data firm Markit said in a separate report its final U.S. Manufacturing Purchasing Mangers Index rose to 56.4 in May from 55.4 in April, following a preliminary reading of 56.2.
Data on manufacturing activity in China meanwhile raised hopes that Beijing's targeted measures to bolster growth are having an impact. Chinese factory activity grew at the fastest pace infive months in May but euro zone manufacturing growth slowedmore than initially thought, fuelling expectations theEuropean Central Bank will ease policy this week.
"The Chinese numbers were fractionally higher. We arebeginning to make some progress but it is consistent with thisstory that the Chinese economy is not going to grow as fast asit has in the past," said Peter Dixon at Commerzbank.
"The European numbers were in and around the ballpark. It'snot the kind of data the ECB is going to react to instantly butit is part of a bigger puzzle that says we need more growth inEurope."
Markit's final euro zone Manufacturing Purchasing Managers' Index (PMI) slipped to a six-month low of 52.2 in May from April's 53.4 as strong figures from Germany failed to offset contraction in France. The final number was below the initial reading of 52.5 butheld above 50 for the 11th straight month. A subindex measuring output sank to 54.3 from 56.5, weaker than the initial reading of 54.7.
"The slowdown in euro zone manufacturing activity in Mayreinforces belief that the ECB will deliver a package ofmeasures at its 5 June policy meeting," said Howard Archer atHIS Global Insight. To spur growth, boost lending and drive up inflation the ECBis widely expected to cut its deposit rate to below zero, reduceits main borrowing rate and launch a refinancing operation aimedat businesses when it meets on Thursday.
Inflation in the 18 nations using the euro is predicted tohave held steady at just 0.7 percent in May, well within theECB's "danger zone" of below 1 percent and also below itspreferred 2 percent ceiling. Germany, Europe's largest economy, again supported thetepid overall growth but in France, the bloc's second-largest economy, the PMI sank back below the 50 mark after just two months of expansion. In non-euro using Britain, manufacturing activity keptexpanding at a rapid pace in May, suggesting the economicrecovery there has lost little of its shine this quarter.
The reassuring Chinese factory data lifted world stocks and commodities on Monday, although markets are waiting to see how far the ECB will go with policy easing plans.
The weaker-than-expected initial ISM report weighed on U.S. stocks and helped bond prices, but equities recovered after chatter of a correction started making the rounds.
STRONGER CHINA
China's official PMI, which is geared towards bigger,state-owned firms, rose to 50.8 in May, from April's 50.4, theNational Bureau of Statistics said on Sunday, beating marketexpectations of 50.6.
"Recent pro-growth measures, which were stepped-up furtherlast Friday, may have lent a helping hand here," said NikolausKeis at UniCredit. China's manufacturing data bolstered expectations that the world's second-largest economy is regaining strength asthe government's pro-growth measures kick in.
Beijing stepped up policy fine-tuning in recent weeks andhas unveiled a slew of measures this year to help shore up theeconomy, which dipped to an 18-month low in the first quarterand is on track to post the weakest annual showing in 24 years. China's cabinet announced new easing measures on Friday tohelp lower funding costs and reduce operating burdens forcompanies to give more support for the real economy, adding tomoves that included hastening construction of railways andpublic housing.
In South Korea, Asia's fourth-largest economy and one of theleading manufacturing and export powerhouses, the HSBC/Markitmanufacturing gauge slid below 50 while trade data showedexports fell. In India, the manufacturing PMI edged up but came inslightly below the median forecast in a Reuters poll.Indonesia's PMI surged to a record high but hopes were temperedafter its trade balance slipped back into deficit in April aftertwo consecutive months of surpluses.
(Additional reporting by Andy Bruce in London, Adriana Nina; Kusuma and Nilufar Rizki in Jakarta and Sumanta Dey in Bangalore; Editing by Richard Borsuk, Janet Lawrence and Meredith Mazzilli)