July Flash PMIs Accentuate Monetary Policy Divergence
Economic news and commentary for July 24, 2023
S&P Global Flash PMIs
• Japan: 52.1 (Jun 52.1)
• UK: 50.7 (Jun 52.8)
• Australia: 48.3 (Jun 50.1)
• Germany: 48.3 (Jun 50.6)
• France: 46.6 (Jun 47.2)
A first glimpse of July PMIs suggests that developed economies are being constrained by tightening central banks. Germany, France, and the UK all saw their S&P Global Flash Composite PMIs decline by 1-2 pts in the first half of this month as business output weakened alongside a decline in demand in the industrial sectors. The UK and Eurozone Manufacturing PMIs both reached 38-month lows of 45.0 and 42.7 respectively. There is a bit of a divergence between the Eurozone and the UK however as the UK still sees a rise in output (though it’s the weakest for 6 months) while the Eurozone’s business output declined sharply, at the fastest rate in 8 months. However, both service sectors continued to see growth and kept composite PMIs from dropping too steeply. It is also worth noting that the further weakening of both economies has led to a significant softening in inflation. In the Eurozone, “prices charged by manufacturers fell at a rate not seen since the height of the global financial crisis in 2009 amid slumping demand, while service sector selling price inflation cooled to a 21-month low,” and in the UK, “the latest round of prices charged inflation was the slowest for nearly two-and-a-half years.”
Japan stands out as the only PMI that didn’t decline in July, holding fast at a healthy 52.1 as a slight improvement in manufacturing was offset by a slight decline in services. Japan also stands out as the only developed economy that hasn’t seen sharp tightening from its central bank, and this is not a coincidence. There are expectations that this will change soon though, and it comes on the back of a softening in Japan’s growth momentum. The latest reading of the services PMI was the weakest since January and came amid a sharp slowdown in new business growth. Additionally, Japanese firms reported the softest level of optimism surrounding the year-ahead outlook so far in 2023.
Still to come…
9:45 am (EST) - US Flash Compsite PMI
Morning Reading List
Other Data Releases Today
Spain's PPI fell to -8.1% YoY in June, down from -6.8% YoY in July as deflation for producers sets in further. Most notably, this was a strong downside surprise on the -7.1% YoY forecasted. The energy index registered a decline of -26.3% YoY.
Euro area government debt (% of GDP) fell again in Q1 2023, down -0.2 ppts to 91.4% from Q4 2022. Over the last year, debt (% of GDP) is down -3.8 ppts from 95.0%. The decline is a result of declining loans and intergovernmental lending.
The Chicago Fed National Activity Index fell to -0.32 in June, down from -0.28 in May. Indicator breakdown:
Employment: 0.03 (May -0.06)
Consumption: -0.02 (May -0.01)
Sales: -0.05 (May -0.01)
Production: -0.27 (May -0.20)
PMIs
Eurozone PMI suggests worsening economic conditions (ING) - The eurozone PMI suggests contracting economic activity at the start of the third quarter. Overall, this fits a trend of weakening survey indicators over recent months and increases the recession risk for the bloc. The survey continues to suggest moderating price pressures, but the impact of wages on services will remain a concern for ECB hawks.
United Kingdom flash PMI data point to cooler inflation as economy stalls (S&P Global) - The UK economy has come close to stalling in July which, combined with gloomy forward-looking indicators, reignites recession worries. July's flash PMI survey data revealed a deepening manufacturing downturn accompanied by a further cooling of the recent resurgence of growth in the service sector.
Eurozone flash PMI signals cooling inflation amid rising recession risks (S&P Global) - Eurozone business output fell at the fastest rate for eight months in July, according to the latest HCOB flash PMI survey data produced by S&P Global, marking a weak start to the third quarter. Deteriorating forward-looking indicators such as future output expectations and new order inflows also point to the likelihood of the downturn deepening in coming months, prompting companies to pull back on hiring.
Podcast: Germany July Manufacturing PMI shocker sets up dovish ECB (Saxo Bank) - Germany's horrific initial July Manufacturing PMI print of 38.8 begs the question on why the ECB is even hiking this week. We can likely expect even more dovish shift from Lagarde and company as growth woes dominate the focus.
US
Research US - Fed preview: July marks the end of the hiking cycle (Danske Bank) - We expect the Fed to hike interest rates for the final time by 25bp in the next week's meeting, and then go on hold. While economic activity has still held up well, easing underlying inflation and declining inflation expectations limit the need for further rate hikes.
Fed to keep up the squeeze with another 25bp hike (ING) - The Federal Reserve is set to resume its policy tightening on 26 July. Inflation is moderating but remains well above target and with a tight jobs market and resilient activity, officials may feel they can't take any chances. The Fed will continue to signal the prospect of further hikes, but with the credit cycle turning, we doubt it will carry through.
No trumpets for the end of a historic tightening cycle (EY Parthenon) - We anticipate the Fed will raise the federal funds rate range by 25 basis points (bps) to 5.25%–5.50% at the July Federal Open Market Committee (FOMC) meeting. This will more than likely mark the end of a historic tightening cycle, but those expecting a fanfare will be disappointed — the Fed will make every effort to sound as hawkish as tolerable for financial markets, to avoid an undesired easing of financial conditions.
US immaculate disinflation: How much should we thank the Fed for? (Allianz) - Half of the decline in US inflation since last year is the making of the Fed. The fall of inflation to 3% in June has cheered markets by strengthening the argument that the US economy can achieve a soft landing, avoiding a recession and normalizing inflation. We find that the Fed has contributed to lowering inflation through two channels: (i) by cooling aggregate demand growth (-2pps) and (ii) by managing to keep inflation expectations anchored (-3pps). In total, the Fed has pulled inflation down by -5pps over the past 12 months.
Employment Situation in June: State-Level Analysis (NAHB) - Nonfarm payroll employment increased in 38 states and the District of Columbia in June compared to the previous month, while 12 states lost jobs. According to the Bureau of Labor Statistics, nationwide total nonfarm payroll employment increased by 209,000 in June, following a gain of 306,000 jobs in May.
U.S. Economy: Hazy Daze of Summer (BMO) - The U.S. economy is still on track to virtually stall at year-end, but it should avoid a more painful reckoning if inflation continues to ebb and the Fed stops raising rates soon.
The Best Is Yet to Come (BMO) - In a week where investor attention was mostly distracted by a hotly anticipated, long-awaited, critically important upcoming event—no, not the Barbie movie, the FOMC—markets saw little net move overall.
Inflation: Better But Not Good (Northern Trust) - Coverage of the recent inflation data took me back to those Super Bowl parties. There is reason for cheer, and I welcome signs of progress. But victory laps are premature; plenty of time remains on the clock.
Europe
ECB preview: The final countdown (ING) - The European Central Bank looks set to hike rates by 25bp on Thursday. With the bleak economic outlook and disinflation gaining traction, however, the end to rate hikes is near.
Canada
A biased bank (CIBC) - Give the Bank of Canada two choices: inflation or a recession, and the Bank will take a recession any day. The reason is that
central banks have a lot of experience and effective tools to fight recessions while rising inflation expectations are a central banker’s worst nightmare.
Spending Losing Some Steam (BMO) - The Canadian consumer looks to be losing some wind beneath its wings in the face of still-elevated inflation. Advance figures for June suggest consumer spending could take a meaningful hit to close out Q2, setting the stage for weaker momentum in the second half of the year.
Auto sales drive retail sales growth in May, but momentum is fading (TD Bank) - May brought a sizeable deceleration in retail spending growth. The only sector that points to a decisive gain is auto sales, where both nominal and unit sales were up. The rest of the categories are a mixed bag that points to consumers prioritizing spending on groceries at an expense of discretionary purchases. In real terms, second quarter real consumer spending is now tracking just slightly below 1.0% quarter-on-quarter (annualized).
Canadian retail (May, Jun adv): Sluggish even before rate hikes (CIBC) - While overall GDP in Q2 is still tracking close to the 1.5% Bank of Canada MPR forecast, today's data suggest that consumer spending likely wasn't a significant driver of that growth, even accounting for growth in services spending. Industry data showing strength in areas such as manufacturing and wholesale suggest that inventory accumulation or business investment may be more significant contributors, which wouldn’t be bad news from an inflation point of view.
Asia
China Economic Outlook: Course Correction (BMO) - The latest round of measures, especially the U-turn on the tech crackdown, is a clear-cut positive development for China’s economy though it is unlikely to turn the tide this year. The reality of the situation is that many of the prior engines of growth are either under stress (manufacturing/exports and housing) or simply not required as much as they were in the past (big-ticket infrastructure projects like airports, subways and railways).
Is China Hitting The Wall? (Northern Trust) - China’s reopening was expected to provide economic momentum as the post-pandemic surge in Western countries faded. But instead of providing a boost to global growth, China presently needs of a boost of its own.
China - More targeted support on the cards (ABN AMRO) - We cut our annual growth forecasts for 2023 and 2024. More targeted support initiatives are being announced.
Japan's economic growth sustains in July though price pressures and outlook worsen (S&P Global) - Japan's private sector economy continued to expand at a strong pace at the start of the second half of 2023, according to flash PMI data, extending the growth streak that began since the start of the year. This was again supported by solid services activity growth though the pace of manufacturing output contraction also eased in July.
Turkey Pivots To Economic Orthodoxy (Northern Trust) - In the wake of the Turkish elections in May, many wondered what changes President Recep Erdogan would make. To the surprise of many, his largest shift has been in economic strategy.
Singapore economic growth weakens in first half of 2023 (S&P Global) - Singapore's advance estimate for second quarter GDP for 2023 showed weak expansion at a pace of 0.7% year-on-year (y/y), albeit slightly higher than the 0.4% y/y GDP growth rate in the first quarter of 2023. Economic growth momentum has slowed significantly compared with annual GDP growth of 3.6% in 2022. A key factor driving the slowdown of economic growth in the first half of 2023 has been declining manufacturing output, which fell by 7.5% y/y in Q2 2023.
Russia
Russia’s withdrawal from the Black Sea Grain Initiative (S&P Global) - Russia's withdrawal from the Black Sea Grain Initiative (BSGI), which allowed for agricultural exports from three ports in Odesa region in south Ukraine, has also ended a broader arrangement that enabled both countries to continue exporting via the Black Sea and Sea of Azov, despite the ongoing war in Ukraine.
Monetary Policy
Fed and BoC Balance Sheets: Larger for Longer (BMO) - Next week, the Federal Reserve is widely expected to lift the target range for the fed funds rate by 25 bps to 5.25%-to-5.50% and roughly repeat (from June) that it will “continue reducing its holdings [of securities]”. Last week, the Bank of Canada raised the target for the overnight rate by 25 bps to 5.00%, stating that it is “continuing its policy of quantitative tightening”. Although rate hikes could soon come to an end (if not this month), quantitative tightening (QT) looks to continue for a lot longer.
Commodities
Global | Oil: the pulse between demand and supply (BBVA) - Having passed the halfway point of the year, it is important to reflect on the behavior of the oil market, and to take note of the lessons learned for the second half of 2023.
Markets
Unbearable weight of heavyweights (DWS Group) - Nasdaq adjusting the weights of its index because the Big 7 have become too big. This is not only bad for investors, but also the free market.
Earnings Assessment (BMO) - The recent rally in equities has been driven largely by a rebound in valuations, while the earnings outlook remains a bit cloudy. Bulls will say, great, it will be easy to jump over the expectations bar. Bears will say the sharp rebound in stocks was premature.
Outlook
Flash PMI, Fed FOMC, ECB, BOJ meetings and GDP data (S&P Global) - Flash PMI data for July, due Monday, kickstarts economic data reporting for the second half of 2023, providing the earliest insights into economic conditions across major developed economies. Meanwhile central bank meetings in the US, Eurozone, Japan, Indonesia and Hong Kong SAR join in as highlights in a crowded week. Official GDP and inflation figures from the US, Eurozone, Germany, South Korea and Taiwan will also be eagerly anticipated.
Macro Watch - Artificial Intelligence gains foothold (ABN AMRO) - Artificial Intelligence (AI) has the potential to boost productivity and GDP growth. The productivity shift is likely J-shaped: first a decrease, then with a lag, an increase.
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