A Sharp Manufacturing Decline Leads to Deflation in Output and Input Prices in July
Economic news and commentary for August 1, 2023
Asia
• Russia: 52.1 (Jun 52.6)
• Japan: 49.6 (Jun 49.8)
• Australia: 49.6 (Jun 48.2)
• South Korea: 49.4 (Jun 47.8)
• China: 49.2 (Jun 50.5)
Europe
• Spain: 47.8 (Jun 48.0)
• Netherlands: 45.3 (Jun 43.8)
• UK: 45.3 (Jun 46.5)
• France: 45.1 (Jun 46.0)
• Italy: 44.5 (Jun 43.8)
• Poland: 43.5 (Jun 45.1)
• Czech Republic: 41.4 (Jun 40.8)
• Germany: 38.8 (Jun 40.6)
The broad-based slowdown in manufacturing continued in July as global industrial firms started the third quarter with weak output in response to withering demand. In the Asia Pacific region, only Russia reported a PMI over 50 with Japan, Australia, South Korea, and China all signaling a slight contraction in their respective manufacturing sectors. Most significant is the results out of China where the PMI turned from a slight expansion at 50.5 in June to a new contraction at 49.2 in July. This month, Chinese firms found a renewed decline in orders from both domestic and foreign sources that caused them to cut production for the first time since the beginning of the year. The contraction in export orders was actually the strongest since September 2022. The knock-on effects were twofold. Both employment and prices charged fell in the month extending a streak of contractions in the former to 5 months and in the latter to 4 months. Sentiment remained positive but concerns over sluggish demand persisted. This is not necessarily a surprise as China’s nearest neighbors and closest trading partners are all experiencing their own manufacturing declines.
While Asia’s manufacturing downturn is slight, the European contraction in industrial activity in Europe is substantial. As of July, most countries reported PMIs under 48 and several had readings under 45. This includes the sharp decline in Germany which showed a manufacturing PMI number of 38.8, down from 40.6 in June. This is nearing the record lows set during the global financial crisis and the beginning of the COVID pandemic where the PMI fell below 35. The weakness in its largest member lead the eurozone to report its Manufacturing PMI at a 38-month low of 42.7, down from the already dismal 43.4 in June. Indeed, the reductions seen for factory output and demand for eurozone goods were the most severe since the global financial crisis in 2008-09. The trade-off for weak growth was relief in input and output prices. Both fell at the strongest pace since 2009 which is great news for the ECB. Employment help up better, however, as labor force shrink was only reported as “marginal” though it was the second month of employment contraction in a row.
Still to come…
9:45 am (EST) - US S&P Global Manufacturing PMI
10:00 am - US ISM Manufacturing PMI
10:00 am - US Construction Spending
10:00 am - US JOLTS
11:00 am - World S&P Global Manufacturing PMI
Morning Reading List
Other Data Releases Today
The Reserve Bank of Australia left the cash rate unchanged at 4.1%. The RBA points to uncertainty & the lagging effects of past rate hikes as the reason for the pause but says that "further tightening of monetary policy may be required."
Japan's unemployment rate edged down to 2.5% in June. The number of employed individuals increased 19,000 and the number of unemployed fell -4,000. The labor force grew 14,000.
Euro area unemployment rate was unchanged at 6.4% in June, down from 6.7% a year ago. Labor market slack in the euro area continues to disappear. The total number of unemployed fell -62,000 and is down -441,000 from a year ago.
Reserve Bank of Australia Announcement
Reserve Bank of Australia takes another breather (ING) - Pausing for a second consecutive meeting, today's rate decision is in line with some better inflation data this month and means the Bank can respond to future data events with less fear of overdoing the tightening.
Euro Area Inflation
Euro-area flash inflation: Higher service inflation (Nordea) - Headline inflation eased in July while core inflation remained unchanged. The numbers will not be a game-changer for the ECBs September decision, but rising services inflation is not what the ECB would like to see.
US
Housing Share of GDP Remains Lower in the Second Quarter of 2023 (NAHB) - Housing’s share of the economy remained at 15.8% at the end of the second quarter of 2023. Overall GDP increased at a 2.4% annual rate, following a 2.0% increase in the first quarter of 2023 and 2.6% increase in the fourth quarter of 2022. Despite overall GDP increasing for the fourth consecutive quarter, housing’s share of GDP remained to 15.8% over the course of the quarter.
Not All Recession Theories Make Sense (First Trust Portfolios) - Austrians are different than Keynesians. Austrians think recessions are caused by government failure, while Keynesians think they are caused by market failure. Take the 2008 financial panic. Was it market failure and bad business models or was it using the government to subsidize housing plus mark-to-market accounting? We believe the latter…without the subsidies and bad accounting rule, the recession might not have happened at all.
Banks put the squeeze on US economy as lending conditions tighten further (ING) - The Federal Reserve's Senior Loan Officer Opinion Survey shows banks are being increasingly restrictive in their lending practices while households and businesses are wary of taking on additional borrowing. Given how important credit flow is to the US economy it boosts the chances of a slowdown that will bring inflation back to target.
US Weekly Economic Commentary: Headed for a soft landing? (S&P Global) - Key releases last weak teased the prospect of continued strong growth, tight labor markets, and easing inflation. Can the elusive soft landing be achieved?
Europe
Weaker than expected Italian GDP may help disinflation process (ING) - The surprising contraction in GDP in the second quarter was driven by domestic demand. This could well have affected services, as July inflation data shows. Based on business confidence and labour market data, we believe that another contraction in GDP should be avoided in the third quarter.
Bank of England: 25 or 50 basis points rate hike? (Saxo Bank) - The UK macroeconomic backdrop calls for another 50bps rate hike, but the Bank of England, afraid of overtightening, might opt to hike rates just by 25bps. Such a decision would leave Gilts vulnerable to a more aggressive tightening in the fall unless the BOE pre-commits to a September rate hike. Overall, the summer bull-steepening of the yield curve might extend until the end of the month.
Most European banks prove resilient in bank stress tests (ING) - The European bank stress tests didn't reveal big capital gaps. Overall, we think the results confirm that the banking system is strongly capitalised and we see the results as supportive for bank risk.
Critical raw materials – Is Europe ready to go back to the future? (Allianz) - The future will be powered by metals, but fenced in by iron curtains. Metals and critical minerals such as lithium, cobalt and nickel are crucial for the green transition, used for everything from electric vehicles to wind turbines. The market has doubled in size over the past five years, reaching USD320bn in 2022, according to latest IEA estimates, and is set to at least double by 2040 amid surging demand from EVs and battery storage, as well low-emission power generation and electricity networks.
Polish PMI dips in July on falling new orders (ING) - Poland's manufacturing PMI fell to 43.5pts in July, down from 45.1pts in June, the lowest level since mid-2022, when the domestic economy struggled with the effects of rising energy prices, among other factors. The assessment of current production, orders, employment and purchases all worsened in July from the previous month.
Mexico
Mexico | GDP grew 0.9% QoQ in 2Q23 driven by the tertiary sector and industry (BBVA) - With the preliminary data for 2Q23, GDP grew 3.6% in 1H23 (vs 1H22), reaching a level 2.7% above that reported in pre-pandemic (4Q19).
Inflation
Inflation Monitor for July 31 (BMO) - Key U.S. inflation metrics continued to slow, while consumer spending picked up in June, providing sturdy economic momentum heading into Q3 and increasing the odds of a soft landing.
Commodities
The Commodities Feed: Copper drops from three-month high after weak China manufacturing data (ING) - Copper dropped from a three-month high this morning after weak manufacturing data from China added to concerns over the economic recovery in the world’s biggest metal consumer.
Real Estate
Some Buyers Remain Engaged, Despite Lower Affordability (NAHB) - Despite lower perceptions of affordability, the share of prospective home buyers who are actively engaged in the purchase process (i.e., have moved beyond the planning phase) remained essentially unchanged between the first and second quarters of 2023, at 56% and 55%, respectively. The lack of change in this metric suggests that some buyers are willing to continue trying to find a home despite higher prices and mortgage rates.
Research
Monetary Transmission through Bank Securities Portfolios (San Francisco Fed) - We study the transmission of monetary policy through bank securities portfolios for the United States using granular supervisory data on bank securities, hedging positions, and corporate credit. We find that banks that experienced larger market value losses on their securities during the monetary tightening cycle in 2022 extended relatively less credit to firms. Such a spillover effect was stronger for (i) available-for sale securities, (ii) unhedged securities, (iii) low-capitalized banks, and (iv) banks that have to include unrealized gains and losses on their available-for-sale securities in their regulatory capital. Our findings provide evidence for a forceful transmission channel of monetary policy that is shaped by the regulatory framework of the banking system.
Deconstructing Hours Worked: How Did Recent Recessions Differ? (St Louis Fed) - The unemployment rate is arguably the best-known indicator of labor market conditions, yet it is only one among many that the Fed closely monitors in maintaining its dual mandate of maximum employment and price stability. Labor market tightness and the possibility of a “soft landing,” for example, has garnered a lot of attention so far in 2023. Hours worked, which was recently brought up by policymakers, is another.
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