Major Services PMIs Show a Booming Global Services Sector
Economic news and commentary for March 3, 2023
S&P Global Services PMIs
Asia Pacific:
• India: 59.4 (Jan 57.2)
• China: 55.0 (Jan 52.9)
• Japan: 54.0 (Jan 52.3)
• Russia: 53.1 (Jan 48.7)
• Australia: 50.7 (Jan 48.6)
Europe
• Spain: 56.7 (Jan 52.7)
• UK: 53.5 (Jan 48.7)
• France: 53.1 (Jan 49.4)
• Italy: 51.6 (Jan 51.2)
• Germany: 50.9 (Jan 50.7)
The global services sector is booming. Every major services PMI across Europe and Asia was reported in expansion territory which includes four countries that shifted from out of contraction into growth in February. India continued to house the strongest service sector, but China is the real story with its services PMI rising quickly across the first two months of 2023 to 55.0. Its services sector saw new business grow at the fastest pace since April 2021 and the rate of job creation was the strongest since November 2020. Other countries in the reason likely benefitted from the Chinese resurgence. Japenese export order growth was the 2nd-strongest in over three years, and the contraction in Russian export orders was the slowest in the last 12 months. Australia recovered as well after falling into contraction in January as firms’ demand and outlook stabilized.
European weakness looks to have all but vanished to start 2023, at least in the services sector. Spain, the UK, and France all reported strong expansions in their services activity. Indeed, Spain’s new business growth in the sector was the strongest since November 2021. Germany and Italy were also able to maintain an expansion even it was weaker. Unfortunately, strong services sectors comes with some lingering price pressures in Europe as evidenced by the hot inflation reports that have been coming in lately. Selling price inflation was “little-changed since January and among the strongest seen on record” according to the Eurozone Services PMI, accentuating fears that services inflation will continue to be sticky. This can be traced back to wage pressures which caused services firms’ operating costs to “rise substantially and at a quickened pace.”
Euro Area PPI
Euro area PPI fell -2.8% MoM to 15.0% YoY in January, down from 24.5% YoY in December. The decline in producer prices extends a long run of disinflation since the summer of 2022. Energy and commodity prices have consistently fallen from their peaks, easing cost pressures for firms in Europe. Energy inflation fell -18.0 ppts to 20.5% YoY on a -9.4% MoM decline, and intermediate goods inflation fell -2.4 ppts to 11.3% YoY on a slight 0.8% MoM increase. Other areas actually saw relatively strong monthly increases of 1%+ that can be calculated out to strong annual rates, but base effects caused the annual rates of inflation to lower. The increases in capital goods prices (1.2% MoM) and durable goods prices (1.6% MoM) might be especially troubling since it points to lingering business and consumer demand that is supportive of prices. These rates annualized come out to 15.4% and 21.0% respectively. However, we know that January is a relatively hot month according to already-released data, so there will be some cooling expected in February and March. Regardless, there is strong evidence that a more aggressive rate hike approach will be needed by the ECB as there is not nearly enough disinflation to suggest that prices are on the right path to the desired target of 2%.
Still to come…
9:45 am (EST) - US S&P Global Services PMI
10:00 am - US ISM Services PMI
11:00 am - World S&P Global Services PMI
Morning Reading List
Japan's unemployment rate edged down -0.1 ppts to 2.4% in January as the total number of unemployed fell -4,000 to 167,000. Total employment increased 18,000 to 6.7 million, and a total of 12,000 individuals were added to the labor force.
Germany's trade balance jumped €6.7 bil to €16.7 bil in January with exports up 2.1% MoM and imports down -3.4% MoM. Exports outside of the EU jumped 3.8%: to the UK jumped 7.8% YoY, to the US rose 3.1% MoM, and to China rose 1.4% MoM.
French industrial production fell -1.9% MoM in January and was flat YoY. Manufacturing production fell -1.8% MoM and was only up 0.3% QoQ.
Transport equipment production tanked -6.7% MoM, and non-durables production fell -3.4% MoM.
Italy's Q4 2023 GDP growth was confirmed at -0.1% QoQ. Consumption fell -1.1% QoQ while capital formation expanded 2.0% QoQ. Net exports was the strongest component with exports up 2.6% QoQ and imports down -1.7% QoQ.
Italy GDP
Italian GDP contraction driven by consumption and inventories (ING) - Italian GDP contracted by 0.1% quarter-on-quarter in the final quarter of 2022. We now tentatively anticipate flat growth in 1Q23.
Germany Trade
German exports rebound in January (ING) - It's only a weak indicator of life in the economy, but German exports increased by 2.1% month-on-month in January – not quite enough to offset the sharp December drop.
France Industrial Production
French industrial production falls (ING) - Optimism at the beginning of the year was probably premature. Manufacturing output fell sharply in January in France, confirming that industry is currently in a strong slowdown phase, which is likely to continue over the coming months.
US
Plenty of U.S. jobs, still too few takers (DWS Group) - Never since the 1940s have so many U.S. job openings coincided with so few job seekers. This help explain why the Fed is likely to continue its hawkishly cautious stance.
Globalization in Retreat: Implications for the U.S. Economy, Part IV: Inflation (Wells Fargo) - The marked increase in import penetration that occurred beginning in the 1990s was associated with a significant moderation in goods price inflation in the United States. Prices of "core goods" were more or less flat on balance between the mid-90s and 2019.
US Monthly GDP Index for January 2023 (S&P Global) - Monthly US GDP rose 0.3% in January following a 0.4% decline in December. The increase in January was more than accounted for by a sharp gain in personal consumption expenditures.
Use of Residential Energy Tax Credits Increases (NAHB) - In 2005, Congress established several energy-efficiency tax incentives related to housing that benefit new-home buyers and remodeling homeowners. These policies included the tax code section 25C credit for retrofitting/remodeling existing homes, and the 25D credit for the installation of power production property in new and existing homes. Taxpayers claim these residential energy credits using Form 5695.
Eurozone inflation declines despite higher core rate (ABN AMRO) - Eurozone inflation declined to 8.5% in February, down from 8.6% in January. Meanwhile, core inflation came in higher than expected, jumping to 5.6% in February, up from 5.3% in January. Energy inflation dropped lower again, but food and services price inflation increased. Looking forward, we continue to see both headline and core inflation falling rapidly later in the year on the back of the decline in wholesale energy and food prices as well as dissipating supply chain bottlenecks and lower aggregate demand because of tighter monetary policy.
U.S. vehicle sales fell in February, but showed signs of underlying strength (TD Bank) - U.S. vehicle sales fell 6.2% month-on-month (m/m) to 14.9 million (seasonally adjusted annual rate) units in February. This was slightly above the consensus forecast, which called for a larger decline to 14.7 million.
China
China Update: a preview of the Two Sessions commencing this weekend (Saxo Bank) - China is holding the Two Sessions starting this weekend. Investors will watch closely the Government Work Report delivered on 5 March, in which the focus will be on the GDP growth target of 2023. Expectations are for something between 5% and 5.5%. The Two Sessions will also decide on the 2023 fiscal budget and bond financing quotas. Much interest will also be in the decisions on leadership reshuffle at the State Council, ministerial offices, and regulatory bodies as well as reform of state institutions.
China's Post-COVID Rebound Still Intact (Wells Fargo) - Following strong February PMI data, we are adjusting our 2023 China GDP forecast higher. We now believe China's economy can grow 5.5% this year, and given the country's size and influence in a global context, we are now more convinced the global economy can avoid recession this year. Strong momentum behind the rebound also lead us to believe the incentive for easier PBoC monetary policy in the near-term has diminished, and only until the post Zero-COVID surge in activity fades by early 2024, do we expect China's central bank will look to trim Reserve Requirement Ratios again.
Europe
EU trade with Russia continues to decline (Eurostat) - EU trade with Russia has been strongly affected following Russia's invasion of Ukraine, with the EU imposing import and export restrictions on several products. The effects of these measures have been particularly visible in the latest months.
Spanish economy picks up sharply in February (ING) - In February, Spain's service sector experienced a significant pick-up in activity, while the manufacturing sector recorded growth for the first time since June 2022. However, the downside of this is that inflation will remain high for longer.
Euro-area flash inflation: Sticky (Nordea) - Higher-than-expected core inflation increases worries about the stickiness of inflation. Wages will be in focus in the coming months.
ECB Preview: Higher for longer – now seen at 4% (Danske Bank) - Underlying inflation pressures have yet to improve for the ECB to signal an end to its policy rate hikes. Since the February meeting, the economic outlook and labour market still show resilience, pushing the eventual end of ECB hiking further out.
EUR rates: 4% is the new 3% (ING) - German 10y yields are at their highest level since 2011! EUR 5y5y inflation swaps are at their highest level since 2012. 2y EUR swap rates haven’t been this high since 2008.
Japan
Japan: Inflation may have peaked in January (ING) - Inflation has cooled sharply in Japan, mainly due to the government's energy subsidy programme. The labour market has tightened further led by the service industry. Meanwhile, the central bank's new governor Kazuo Ueda won't rush to exit easing monetary policy.
Canada
Bank of Canada preview: At the top with only downside to come (ING) - After 425bp of interest rate hikes, the Bank of Canada signalled it would pause to digest the impact. Since its January meeting, growth has disappointed and inflation has slowed more than expected, though job creation continues at pace. Canada is heavily exposed to higher rates and we see downside risks to growth, with rate cuts on the cards for 4Q.
Australia
NAB Consumer Insights Survey: Financial Hardship – Q4 2022 (NAB) - 4 in 10 Australians experienced some form of financial hardship in Q4, the highest level in nearly 3 years. 1 in 3 identify money as a significant cause of stress in their lives and almost 1 in 4 believe they are struggling to make ends meet.
Inflation
Commodities edge lower as inflation fears resurface (S&P Global) - The Material Price Index (MPI) by S&P Global Market Intelligence fell 0.5% last week, its fifth consecutive decline. The decrease was mixed with only five of the ten subcomponents down. The MPI now sits 25% lower year on year (y/y). Prices, however, remain far higher (40%) than the pre-pandemic levels of the fourth quarter 2019.
FX
A Snapshot Of The U.S. Dollar (First Trust Portfolios) - The dollar is still regarded as the world’s primary reserve currency. Its relative strength over time can be influenced by such things as central bank monetary policy, geopolitics and trade. U.S. investors with exposure to foreign securities, commodities and the stocks of U.S. multinational companies are particularly vulnerable to fluctuations
in the U.S. dollar.
FX Update: Half-hearted USD rally despite yield pressure (Saxo Bank) - The US January PCE inflation data came in far hotter than expected at the core, which took US treasury yields and Fed tightening expectations higher still and prompted a USD rally extension, particularly against the yield-sensitive JPY.
Outlook
The search for a new equilibrium: ING’s March Monthly (ING) - With a longer period of subdued growth in the eurozone now expected alongside a significant slowdown for the US economy, it seems that recent optimism may have been short-lived. Major economies are still out of sync as the path to renewed balance remains unclear.
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