Flash PMIs, German Sentiment, UK Industry All Point to Strong Start to 2023
Economic news and commentary for January 24, 2023
S&P Global Flash Composite PMIs
• Japan: 50.8 (Dec 49.7)
• Germany: 49.7 (Dec 49.0)
• France: 49.0 (Dec 49.1)
• Australia: 48.2 (Dec 47.5)
• UK: 47.8 (Dec 49.0)
According to the S&P Global Flash Composite PMIs, the new year is off to a good start. The recessionary pressures that dominated most of the end of 2022 have more or less receded into fears of a simple slowdown in growth. Germany and France are two examples of this with the former experiencing one of the strongest contractions in Europe in the second half of 2022. Both are now seeing only slight declines in growth with PMIs in the 49s and manufacturing PMIs in the mid-48s. The UK on the other hand fell deeper into contraction as its experience of demand deterioration was reported as worse than its European counterparts. Indeed, while Germany and France reported some moderate improvement in their service sectors, the UK saw the service sector contract at the steepest pace in two years.
Outside of Europe, we see two different readings in Japan and Australia. In Japan, the service sector continues to be a boon for growth while new export orders continue to decline as Japanese trading partners experience a slowdown in growth that has not been felt domestically thanks to easier monetary policy from the Bank of Japan. On the other hand, that easy policy is likely leading to higher inflation which was reported in a stronger input prices reading. In Australia, both the services sector and the manufacturing sector were shrinking but at slow rates. The overall situation improved only slightly as the headline PMI reading reached a 3-month high thanks to new orders rising for the first time since September 2022.
Germany GfK Consumer Climate
The GfK consumer confidence index is forecasted at -33.9 in February, up from -37.6 in January. The recovery in sentiment is happening, but it’s happening slowly. Most noticeable was the improvement in consumers’ expectations for the economy. The economic expectations jumped to -0.6 in January, up from -10.3 in December. This means that economic sentiment has almost returned to its long-term average, which is around zero points. Additionally, consumers' income expectations remain on course for recovery. The indicator is increasingly leaving behind its record low of September 2022, gaining 11.2 points in January, thus climbing to -32.2 points. Despite the improvements in these two subindexes, the “propensity to buy” index continued to struggle, falling further in January to -18.7. The milder winter has certainly helped households save on their energy bills but that hasn’t prevented a high level of uncertainty caused by inflation and war from keeping consumers from opening their wallets. With that being said, the upside for growth in Germany looks limited even if the downside risks are slowly abating.
UK CBI Industrial Trends
The UK CBI Industrial Trends Survey’s Output Volumes index was flat in January, up from -1% in December. In terms of industries, rising output in the mechanical engineering and food, drink & tobacco sub-sectors was offset by falls in chemicals, metal manufacturing, and motor vehicles & transport equipment. The outlook, though, has made a turn for the better. Firms reported in January that they expect manufacturing volumes to increase briskly in the next three months (19%). Similar to the trend in output, we also saw the new orders index come in flat, after falling slightly at -3% previously, while the outlook for the next three months was much brighter (9%). The deceleration of industrial growth at the end of 2022 has led to inflationary pressure cooling at the beginning of 2023. The average costs index was 64%, down from 82%. While this is still significant historically, the reading is the slowest reported since April 2021. Cost growth is expected to slow further in the quarter to April (53%). However, fears of stickier wage inflation are likely to be further substantiated by labor market strength. Manufacturing firms reported that they continue to hire at a solid pace with the numbers employed index registering 14% in January and expected to rise to 24% in the next three months. On a more positive note, the strong employment impulse should help to make any recession a short one.
Still to come…
9:45 am (EST) - US S&P Global Composite PMI
10:00 am - US Richmond Fed Manufacturing PMI
7:30 pm - Australia CPI
Morning Reading List
Other Data Releases Today
The S&P Global Eurozone Flash Composite PMI was 50.2 in Jan, up from 49.3 in Dec. This is the first expansion since Jun 2022, though marginal. The services sector grew slightly (50.7) while manufacturing output edged lower (49.0).
The French business climate indicator edged down -1 pt to 102 in January. The manufacturing and services climate indexes both edged up 1 pt to 103 and 105 respectively. The employment indicator increased 2 pts to 112.
Canada's New Housing Price Index was flat and up 3.9% YoY in December after falling -0.2% MoM in November. Nationally, new home prices rose at a slower pace in 2022 (+7.7%) compared with 2021 (+10.3%).
Flash PMIs
Eurozone PMI improves as mild winter helps economy (ING) - The jump in the composite PMI from 49.3 to 50.2 indicates that the economy is performing better than expected. Businesses are experiencing fewer cost pressures than before, but selling prices remain high. For the ECB, this should seal the deal for a 50 basis point hike next week.
French companies expect just a short-lived economic slowdown (ING) - Today's PMI and business climate indices are the first sentiment data for French companies this year. They indicate that an economic slowdown is underway, but companies are saying it may only be short-lived. We are more cautious and believe that a near-stagnation of activity over the year as a whole is likely.
Flash UK PMI data signal steeper economic decline at start of year, but prospects brighten (S&P Global) - Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession. Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year. Jobs also continued to be lost as firms tightened their belts in the face of these headwinds, though many other firms reported being constrained by an ongoing lack of available labour.
Leading Economic Index
Down for 10 Straight Months, LEI Signals Recession in the "Near Term" (Wells Fargo) - The tenth consecutive decline in the Leading Economic Index (LEI) was worse than expected in December and included downward revisions to November's report. Labor components lifted the coincidence and lagging indices to scant gains...for now.
Outlook
Global Monthly - Where is the recession? (ABN AMRO) - Collapsing energy prices means the real income shock facing European consumers is likely to be less severe than previously thought, leading us to upgrade our eurozone and UK growth forecasts. China’s reopening is also a positive, though the flipside is that it may complicate the inflation fight. Indeed, inflation remains the key challenge facing advanced economies, and the resulting tightness in monetary policy this year is a key reason why we still expect a recession in the eurozone and UK.
Upbeat? Me? Hardly. (BMO) - That brings us to 2023. There seems to be more optimism, mostly caused by the IMF’s view that it will likely not downgrade growth for the fourth time. (Yes, the bar is low, apparently.) And, Managing Director Kristalina Georgieva believes that global growth will “bottom out this year” and 2024 will be a year in which “we finally see the world economy on an upside”. Perhaps she noted all the headlines as she inserted some caution on the final day of the Forum, warning that things weren’t “fabulous” and to be “careful not to get” too upbeat.
Market view too rosy – for now (BlackRock) - China’s reopening, lower energy prices, and cooling inflation reinforce our long-term positive view on equities. Yet we think market optimism has come too soon.
Eurozone - Shallow, yet prolonged recession on the cards (ABN AMRO) - We have changed our base scenario for the eurozone economy and now expect a more shallow but more prolonged recession than we did before. The ECB is expected to continue to hike rates, with the deposit rate peaking at 3%. Policy rate cuts could be on the agenda before the end of the year.
US
US Weekly Economic Commentary: Shrinking goods sector (S&P Global) - The latest data on industrial production suggest that the manufacturing sector might have entered recession late last year as consumer demand continued to shift away from goods and toward services.
January Flashlight for the FOMC Blackout Period (Wells Fargo) - Given recent signs of slowing economic growth, we readily acknowledge that rates may not rise quite as high as we envision. But we believe that in order to bring inflation back to 2% on a sustained basis, the FOMC will maintain its target range at the terminal rate longer than most market participants currently expect. We do not expect the FOMC to begin cutting rates until early 2024.
Shifting Gears: Rebalance and Realignment in the Economy (John Williams, New York Fed) - In my remarks this evening, I'm going to discuss inflation, the continued imbalances between supply and demand, and the effects that monetary policy is having on different sectors of the economy. I'll share what this means for the economic outlook in the United States, and how the Federal Reserve's policy actions support our bedrock commitment to price stability.
Bullard Talks about Policy Rate and “Soft Landing” Prospects with Wall Street Journal (Jim Bullard, St Louis Fed) - St. Louis Fed President Jim Bullard discussed his expectations for the policy rate and inflation and the prospects for a “soft landing” for the U.S. economy in a live interview with The Wall Street Journal.
China
China - Goodbye Zero-Covid, Welcome Recovery (ABN AMRO) - Rapid Zero-Covid exit means China's rebound will start earlier and will be a bit more pronounced. Following a turbulent exit, we expect a staged recovery in domestic demand and economic growth. We raise our 2023 growth forecast to 5.2%, from 4.8%.
Canada
Bank of Canada hits the peak (ING) - The BoC is set to raise rates one last time on Wednesday with a 25bp hike, taking the overnight rate to 4.5%. Economic activity is slowing and inflation is coming down and what is likely to be characterised as a pause for assessment is set to mark the peak for rates. Rate cuts will be on the agenda later in 2023. The initial CAD reaction may be rather contained.
Mexico
Mexico’s nearshoring potential likely to grow as alignment with US increases (S&P Global) - Mexican President Andrés Manuel López Obrador (AMLO) hosted US President Joe Biden and Canadian Prime Minister Justin Trudeau in Mexico City between Jan. 9 and 11 for the North American Leaders' Summit. The main issues on the agenda and the resulting pledges were all on regional supply chains, migration, and security co-operation.
Europe
Ukraine & Russia: source of 1/3 of EU cereal imports (Eurostat) - Since the start of Russia’s invasion of the whole of Ukraine in February 2022, there have been concerns over a global food crisis. These were primarily linked to product shortages and the blockade of Black Sea ports, which hindered Ukraine from exporting agricultural goods (mostly wheat). In July 2022 an agreement was reached allowing ships to transport agricultural goods from Ukrainian ports.
Inflation
Inflation Monitor for January 23 (BMO) - Consumer and producer price inflation continue to decelerate following aggressive central bank tightening.
Real Estate
Fewer Adults are Planning a Home Purchase (NAHB) - The share of adults planning a home purchase in the next 12 months dropped to 13% in the final quarter of 2022, down from 15% in the previous quarter. The drop is not surprising, given that housing affordability worsened during this period, as mortgage interest rates surpassed 7.0% and reached levels not seen in nearly 20 years.
FX
USD to fall out of favour over 2023 (CIBC) - With the Fed set to undershoot market expectations for the peak fed funds rate, and attention turning to policy tightening in other advanced economies, look for the USD to weaken in 2023.
A Historically Strong Start For Emerging Market Currencies (Wells Fargo) - Emerging market currencies have outperformed over the first few weeks of 2023. In a historical context, the early-year rally emerging market currencies are experiencing has only been beaten twice in the last twelve years. We can attribute this outperformance to a Federal Reserve that is likely to slow the pace of monetary tightening as well as the re-opening of China's economy. Going forward, we believe emerging market currencies can continue to outperform; however, the path ahead may be bumpy.
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