ON DECK FOR FRIDAY, JUNE 23
KEY POINTS:
- Global PMIs drive risk-off sentiment
- The PMIs offer baby steps toward necessary economic softness…
- …as price pressures are persistent but varied
- Gilts front-end underperforms post-BoE as PMIs flag ongoing price pressures...
- ...and UK retail sales surprised higher
- Japanese core CPI posts hotter than usual gain
- US PMIs on tap
- Light central bank-speak on tap
The good news is that central banks are mostly out of the way now, until the next round in July before many of them take August off. The bad news is that we’re back to the grind of watching incoming data. A wave of global purchasing managers indices is driving risk-off sentiment this morning (charts 1, 2). Sovereign bonds are generally richer with the UK front-end underperforming perhaps as the post-BoE setting is more focused upon the firm price signals in their PMIs. The dollar is broadly stronger. N.A. equity futures are down by about ½% and European cash markets are similarly softer after Asian exchanges closed around 1% lower across the board.
We watch PMIs because a) they are correlated with in-quarter GDP growth, b) they inform price pressures through the eyes of folks making the purchasing decisions in service and manufacturing sectors, and c) because they inform supply chain, investment and hiring developments as some of the freshest ‘soft’ data before hard data arrives with a lag.
The PMIs generally signalled softer growth at the margin and milder price pressures, but not uniformly so. This is a baby step in the direction of disinflationary developments as global economies haven’t even begun the process of opening up meaningful slack as one driver of the kind of inflation we are getting today. In fact, some of the PMIs were either stable in q/q terms correlated with GDP growth or higher. Comments follow including links to the source write-ups that contain useful details, albeit while suffering from a lack of consistency in the style and coverage of the details and the terminology that is used.
- Eurozone: The composite PMIs fell by 2.5 points to 50.3 which is barely in above-50 growth territory. Chart 3 shows the connection to GDP growth; the q/q change in the composite PMI deteriorated a touch which is a negative signal for Q2 GDP growth. Services (52.4 from 55.1) and manufacturing (43.6 from 44.8) both weakened as mild service sector growth continues to offset a manufacturing contraction. The source write-up is here. Total new orders fell for the first time since January as manufacturing output fell for a third month and service sector output grew at a slower pace. Order backlogs also weakened. Job growth slowed but remains positive. Output prices climbed again but at the slowest pace in 27 months as falling manufacturing output prices were offset by slower but still positive service sector price increases.
- UK: The composite PMI fell back to 52.8 from 54 as the service sector’s expansion continued at a cooler pace (53.7 from 55.2) and the manufacturing downturn accelerated (46.2, 47.1 prior). Chart 4 shows the connection to GDP growth; in this case, the q/q change in the composite PMI was similar to the prior quarter which little changed in q/q GDP growth in Q2 compared to Q1. The source write-up (here) indicated that new orders grew at a slower pace. Job creation continued at the fastest clip since September of last year. Order backlogs improved for a fifth straight month. Output price inflation saw little relief as service sector prices posted a sharp gain.
- Japan: Japan’s growth also slowed according to the composite PMI that fell by two points to 52.3. Manufacturing edged slightly into contraction territory (49.8 from 50.6) while service sector growth remains solid at a slightly cooler pace (54.2 from 55.9). Chart 5 shows the connection to GDP growth; in Japan’s case, the q/q change in the composite PMI supports GDP growth. The source write-up (here) indicated that manufacturing output price inflation was at a 21-month low but service price inflation remains elevated albeit at the softest since January.
- Australia: The composite PMI fell by 1.1 points to 50.5 which is hovering just above the dividing line between expansion and contraction to signal mild growth. Chart 6 shows the connection to GDP growth; in Australia’s case, the connection suggests slight improvement. Manufacturing remains in contraction (48.6 from 48.4) while service sector growth eased (50.7 from 52.1). The source write-up (here) indicated that new orders picked up due to the service sector, employment growth continued and output price inflation accelerated to the strongest rate since February.
UK retail sales volumes surprised higher in May’s data that showed a gain of 0.3% m/m (consensus -0.2%). Ex-gas sales were up 0.1% m/m (consensus -0.1%). The mild gain had low breadth.
Japanese core CPI was up by 0.3% m/m in May which is cooler than the prior month’s 0.7% gain but remains above norms for a month of May compared to all prior like months. That’s not really new information since it is generally consistent with the more timely results from the Tokyo CPI gauge. Chart 7 shows seasonally adjusted annualized m/m core inflation.
Some central bank-speak is on tap this morning. Lagarde only spoke about green finance with no policy implications. A few other central bankers are on tap but with low expectations. The US global PMIs are on tap but the Fed prefers the more ISM gauges that are more skewed toward the domestic economy. Nothing is due out in Canada ahead of an active calendar next week.
Banxico’s decision yesterday afternoon offered no material surprises either in terms of the expected hold at an overnight rate of 11.25% or in terms of statement changes compared to the prior statement. Our Mexico City economist Eduardo Suárez offers a detailed write-up here. Banxico unanimously decided to “thoroughly monitor inflationary pressures” that are expected to be “complicated and uncertain throughout the entire forecast horizon, with upward risks.” That’s enough to signal an ongoing pause in keeping with guidance from central bank officials that have leaned toward pausing for 2-3 meetings.
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