Flash PMIs Show Growth Slowdown Across the Board
Economic news and commentary for June 23, 2023
S&P Global Flash PMIs
• Japan: 52.3 (May 54.3)
• UK: 52.0 (May 54.0)
• Germany: 50.8 (May 52.9)
• Australia: 50.5 (May 51.6)
• France: 47.3 (May 51.2)
The S&P Global Flash PMIs fell in May across all reporting developed nations. While only one nation moved from an expansion in economic activity to a contraction, growth was downgraded in every PMI reading. The broad-based slowdown is one of the first clear indications that aggressively tight monetary policy is having an impact on economies that have seen that stimulus taken away. PMIs in European countries dropped consistently with Germany and the UK seeing -2 pt declines in the Composite PMI Output Indexes. France’s decline was stronger, and it caused firms there to signal that a moderate contraction had taken over in Q2. Overall, the Eurozone Composite PMI fell to a 5-month low of 50.3 as slight services activity growth (52.4) offset a sharp decline in manufacturing output (44.6). On a more positive note, inflationary pressures were at near-term lows. Input costs rose at the slowest rate since December 2020 and average selling prices for goods and services rose at the weakest rate since March 2021. The UK’s reading of 52.0 pointed to stronger growth than the Eurozone, but inflation was still an issue (as we have seen in the past week), and BoE tightening will likely level the playing field in the coming months.
Australia’s growth continued to show signs of being impacted by rate hikes in the last quarter by the Reserve Bank of Australia. In this case, though, growth in services activity had weakened significantly (50.7) and the manufacturing sector was holding up better in comparison to Europe (49.1). As a result of some resilience in the numbers, inflation remained elevated. Selling price inflation rose to the strongest degree since February. Finally, in Japan, we see meaningful slowdown in overall growth with the composite PMI index falling -2 pts to 52.3. The services sector remained exhibiting healthy growth (54.2) while manufacturing began to contract again (48.4). Inflationary pressures remained on a downward trajectory at the end of the second quarter. Input costs rose at the softest pace since February 2021, while selling price inflation cooled to a 21-month low. Incredibly, these developments occur even though the BoJ has not moved to normalize policy yet. As a result, the normalization process could be delayed if significant growth is not sustained through Q2.
Still to come…
9:45 am (EST) - US S&P Global Flash PMI
Morning Reading List
Other Data Releases Today
Japan's CPI increased 0.1% MoM & 3.2% YoY in May, down from 3.5% YoY in April.
Core CPI: 4.3% YoY (0.3% MoM)
Food: 8.6% YoY (0.6% MoM)
Energy: -8.2% YoY (-3.8% MoM)
Durable Goods: 9.0% YoY (1.6% MoM)
Services: 2.1% YoY (0.1% MoM)
UK retail sales (volume) increased 0.3% MoM in May, after a 0.5% MoM in April. The volume of sales fell -2.1% YoY.
Food: -0.5% MoM
Non-Food: -0.2% MoM
Non-Store: 2.7% MoM
Fuel: 1.7% MoM
The S&P Global Flash Eurozone PMI was 50.2 in June (5-month low), down from 52.8 in May. New orders fell for the 1st time since January. Input costs rose at the slowest rate since December 2020 and selling prices rose at the weakest rate since March 2021.
German residential prices fell -3.1% QoQ and -6.8% YoY in Q1 2023. This was the largest decline in residential property prices from the same quarter of the previous year since the beginning of the time series in 2000.
UK Retail Sales
UK retail sales bounce, but recession risk is rising amid rate hikes (ING) - The worst is probably behind us for UK retailers, but with the Bank of England poised to hike at least a couple more times, we think the risk of a recession is rising.
Bank of England Review - Stay negative on GBP despite 50bp surprise (Danske Bank) - The Bank of England (BoE) surprised markets and analysts by hiking policy rates by 50bp, bringing the Bank Rate to 5.00%. We view the 50bp hike as front-loaded in nature with wage growth and inflation having surprised to the topside. We pencil in 25bp rate hikes in August and September. This would mark a peak in the Bank Rate of 5.50%
Flash PMIs
Japan June flash PMI data signal solid expansion at end of Q2 despite moderation in growth momentum (S&P Global) - Despite a slowdown in growth momentum from May, as signalled by the latest June flash PMI data for Japan, a solid quarter of growth is expected for Q2 2023. This may well exceed the strong official GDP reading recorded in Q1, with a service sector expansion primarily supporting growth while manufacturing performance lagged.
Eurozone PMI drops again in June, confirming weakness in economy (ING) - The PMI dropped sharply in June, giving a broad sense of weakening economic activity towards the end of the quarter. Another quarter of negative GDP growth is not unimaginable, although the current slump clearly remains mild enough for the European Central Bank not to change course on rate hikes.
Bank of England Announcement
Bank of England hikes more aggressively following shock inflation data (ING) - Consistent inflation surprises convinced the BoE to hike by 50 basis points this month, and it now seems unlikely that the committee will be content with hiking only once more in August. We’re tempted to say that today’s 50bp move won’t become a new trend, but two further 25bp hikes seem like the most likely route after today’s meeting.
Bank of England Revs Up Rate Hikes (Wells Fargo) - In the wake of disappointing inflation news in recent months, the Bank of England (BoE) today decided to deliver a large 50 bps policy rate hike to 5.00%.
US Existing Home Sales
Existing Home Sales Eke Out Modest Growth in May (TD Bank) - Existing home sales rose a modest 0.2% month-on-month (m/m) to 4.30 million units (annualized) in May, coming in slightly above market expectations for a minor decline. Activity is down 20.4% compared to a year ago, but has risen 7.5% from the recent cycle low of 4.0 million recorded in January.
Existing Home Sales Perk Up in May: Although Low Supply and High Rates Keeps Activity Running at a Slow Pace (Wells Fargo) - Existing home sales perked up during May. Total resales rose 0.2% during the month, besting expectations for a slight decline. The modest upturn is the latest sign that housing activity has steadied following the dramatic downturn experienced for most of last year. That noted, higher mortgage rates are clearly still weighing on home buying. Much of the monthly gain was owed to a solid rise in condo sales, which helped offset a slight dip in single-family sales. Furthermore, overall resales registered a 4.3 million-unit pace during the month, which is 20.4% below the 5.4 million-unit pace in May 2022.
U.S. Existing Home Sales Creepin' Up in May (BMO) - Existing home sales increased slightly and continued to hold above the cycle low, but still remained depressed. After taking a hit last year, the housing market looks to be stabilizing amid limited new listings, while a sturdy job market, though moderating, is shoring up demand.
US: Dearth of housing supply keeps prices and construction supported (ING) - US housing demand may have collapsed, but so too has the supply of homes for sale. This means prices are holding up and in some areas continue to rise, despite mortgage rates sitting at a 20-year high. This is good news for home builders as new home sales continue to defy the downturn.
Existing Home Sales Increased 0.2% in May (First Trust Portfolios) - There wasn’t much to get excited about in today’s report on existing home sales, which eked out a small gain in May. We expect the outlook to be choppy moving forward as the housing market faces a series of crosswinds. First, mortgage rates that are currently hovering near 7% remain a headwind to activity. Assuming a 20% down payment, the rise in mortgage rates since the Federal Reserve began its current tightening cycle in March 2022 amounts to a 32% increase in monthly payments on a new 30-year mortgage for the median existing home.
US
The End of the Student Debt Moratorium Will Test U.S. Resilience (TD Bank) - As part of the debt ceiling deal, the U.S. Congress prevented any further extensions to the three-year moratorium on student debt repayment. As a result, over 27 million borrowers will be required to start making regular monthly student debt payments by October. The hit to household consumption could be as much 0.3 percentage points by mid-2024.
Employment Situation in May: State-Level Analysis (NAHB) - Nonfarm payroll employment increased in 39 states and the District of Columbia in May compared to the previous month, while 11 states lost jobs. According to the Bureau of Labor Statistics, nationwide total nonfarm payroll employment increased by 339,000 in May, following a gain of 294,000 jobs in April.
U.S. Economic Outlook, June 2023 (Northern Trust) - The Northern Trust Economics team shares its outlook for U.S. growth, employment, interest rates and inflation.
LEI: The Indicator Who Cried Wolf? (Wells Fargo) - The Leading Economic Index, a trusted composite of multiple leading indicators, fell for the 14th straight month in May. The LEI may have been early in its warning of a coming recession, but it is consistent with our own forecast, which anticipates an eventual recession early next year.
Macro update: Contrary to Market Expectations, Data Shows Mitigated Liquidity Impact as US Treasury Refills General Account (Saxo Bank) - The latest data contradicts the anticipated liquidity drain as the US Treasury replenishes its General Account (TGA) at the Federal Reserve. Analysis reveals that money market funds' purchase of Treasury bills using reverse repo balances has mitigated the liquidity impact. The data shows that a reduction in overnight reverse repo balances counterbalanced the TGA increase. Moreover, bank reserves at the Federal Reserve were nearly unchanged, indicating no contractionary impact on banking system liquidity.
Europe
ECB balance sheet falls but no one may notice (DWS Group) - Next week the ECB's balance sheet will shrink by over 6%. Further reduction will take place much more slowly – with uncertain consequences for the markets.
Riksbank preview: Keeping all doors open (Nordea) - The weak SEK is putting pressure on the Riksbank to hike the policy rate on 29 June. We see an additional rate hike in September and a peak for the policy rate at 4.00%.
Norges Bank Flash: Norges Bank means business (Nordea) - Norges Bank decided to increase the key rate by 50bp to 3.75%. The central bank now signals a high probability for a peak rate at 4.25%.
China
Correlations with China’s yuan are weakening in Asia (ING) - The Chinese yuan still exhibits a strong gravitational pull on other Asian currencies, but it is not as strong this year as it has been.
Mexico
Mexico | The end of the Fed hiking cycle is near (BBVA) - In its most recent decision, the Fed did not change the monetary policy rate, keeping it between 5% and 5.25%. This after ten consecutive increases in the steepest hiking cycle in the last fifty years.
Mexico | Banxico held the policy rate steady at 11.25% for the second meeting in a row (BBVA) - Banxico kept a hawkish tone and reiterated that it is set to keep "rates on hold for a while extended time".
Inflation
Global pricing power sinks to two-and-a-half year low as higher interest rates take their toll (S&P Global) - Tracking the impact of higher interest rates on inflation is made easier by survey data that reveal the extent to which prices are changing due to demand conditions.
Global | Inflation and Bottlenecks Chartbook. May 2023 (BBVA) - Headline inflation intensified its downward trend in most countries in May, while core inflation seems to have left the peak behind, but remains high. Supply disruptions are close to normalized levels but continue to soften.
Global Supply Chain Pressures and U.S. Inflation (San Francisco Fed) - Global supply chain disruptions following the onset of the COVID-19 pandemic contributed to the rapid rise in U.S. inflation over the past two years. Evidence suggests that supply chain pressures pushed up the cost of inputs for goods production and the public’s expectations of higher future prices. These factors accounted for about 60% of the surge in U.S. inflation beginning in early 2021. Supply chain pressures began easing substantially in mid-2022, contributing to the slowdown in inflation.
Commodities
Commodity prices up as natural gas supply concerns reemerge (S&P Global) - The Materials Price Index (MPI) by S&P Global Market Intelligence increased 2% last week, a second consecutive rise. The increase was mixed with exactly half of the ten subcomponents rising. Despite rising for the past two weeks the story so far in 2023 remains one of falling commodity prices with the MPI decreasing in 17 out of the last 23 weeks.
Research
Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model (Minneapolis Fed) - This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in the stock of government debt.
Elevated Rent Expectations Continue to Pressure Low-Income Households (Liberty Street Economics, NY Fed) - The Federal Reserve Bank of New York’s 2023 SCE Housing Survey, released in April, reported some novel data about expectations for home prices, interest rates, and mortgage refinancing. While the data showed a sharp drop in home price expectations, some of the most notable findings concern renters. In this post, we take a deeper dive into how renters’ expectations and financial situations have evolved over the past year. We find that both owners and renters expect rents to rise rapidly over the next year, albeit at a slower pace than last year.
Green
Metals remain crucial for net zero technologies (ABN AMRO) - The race is on to decarbonize the world by 2050. There are certain technologies that are crucial to help to this endeavour. However, these technologies depend on a number of raw materials that are experiencing rapid demand growth and high concentration of supply chains in particular countries. In this report we focus on what materials are used in the decarbonization technologies, how prices have developed and what we expect in the near-term and the longer term.
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