March Manufacturing PMIs Show Weak Demand Leading to Softer Inflation
Economic news and commentary for April 3, 2023
S&P Global Manufacturing PMIs
Asia Pacific
• India: 56.4 (Feb 55.3)
• Russia: 53.2 (Feb 53.6)
• China: 50.0 (Feb 51.6)
• Japan: 49.2 (Feb 47.7)
• Australia: 49.1 (Feb 50.5)
• South Korea: 47.6 (Feb 48.5)
Europe
• Spain: 51.3 (Feb 50.7)
• Italy: 51.1 (Feb 52.0)
• Poland: 48.3 (Feb 48.5)
• UK: 47.9 (Feb 49.3)
• France: 47.3 (Feb 47.4)
• Netherlands: 46.4 (Feb 48.7)
• Germany: 44.7 (Feb 46.3)
• Czech Republic: 44.3 (Feb 44.3)
The global manufacturing picture in March continued to reflect regional economic idiosyncrasies with some countries seeing expansion or improvement in their industrial sector while others saw it weaken or maintain a contraction. Despite a detailed view that is mixed, it does seem that there is a general trend of developed market weakness that is reflected directly in the European numbers and indirectly in the numbers of its trading partners.
In the Asia Pacific region, India and Russia maintain their positions as the economies with the manufacturing sector in the best shape. The former saw a solid acceleration in the pace of the expansion while the latter maintained a moderate state of growth despite the situation it finds itself in with regard to sanctions. India’s output rose at the quickest pace since December 2022, and as a result, its inventories of purchases grew at the strongest rate on record. Russia’s increase in new orders was the 2nd strongest since April 2019, but demand was restricted domestically. The decline in export orders was the strongest so far in 2023. Another big story in 2023 is the China reopening; however, it seems to have stalled in March, at least in the manufacturing sector. Its PMI came in at 50.0 after reaching an eight-month high of 51.6 in February. While there was a slight increase in new orders and output domestically, the measure of new export orders turned back to contraction which points to weakness in developed markets like Europe and the US as being a bit contagious. Finally, we have the three Asia Pacific nations seeing contractions, Japan, Australia, and South Korea. All three experienced weaknesses in new orders which lead to lower production rates and high rates of inventory building. Japan saw the strongest rate of finished goods inventory building since February 2009. Despite the weakness in the current conditions, all three nations’ manufacturers maintained an optimistic outlook.
The European manufacturing sector looks to mostly slowed in March thanks to a sharp decline in its talisman economy, Germany. The 44.7 reading was the lowest since May 2020 as the contraction in new orders continued to gather steam. The rate of contraction was more intense than the average for the second half of 2022, and new export orders were the weakest in the last nine months. The demand deterioration did help to calm some supply chain pressures, and as a result, input price inflation was the slowest in over two years. The UK and France both saw sharper contractions in March than in February, though not as bad as Germany. Both saw their production sectors decline with France’s decline being the tenth straight month of manufacturing contraction. Similar to Germany, the weakness helped inflation. UK manufacturing firms reported input price inflation at the lowest rate since June 2020, and French manufacturing firms’ output charges increased at the slowest pace in over two years. The two bright spots in Europe at the moment are Spain and Italy. Both maintained production expansion which supported employment growth as well. Spain’s reported rates of production and employment growth were actually the sharpest in over a year. Both countries were also able to see input cost inflation decelerate while maintaining that manufacturing sector. In Italy, input inflation was the weakest since June 2020, and in Spain, it was the weakest since July 2020. Overall, these reports of cooling costs will be welcome news to the ECB which has had a tough time reining in core inflation since it started hiking rates. The price of this fight against price pressures is clearly being paid as Europe sees its strongest economy’s industrial sector leading the region into a regional manufacturing contraction.
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
10:30 am - Bank of Canada Business Outlook Survey
11:00 am - World S&P Global Manufacturing PMI
12:30 pm - US Investor Movement Index
Morning Reading List
Other Data Releases Today
The S&P Global Eurozone Manufacturing PMI was 47.3 in March, down from 48.5 in February. Despite the contraction, production was the strongest since May 2022. Output price inflation was the lowest in 26 months.
US Personal Income & Outlays
Spending slows, PCE deflator rises less than expected (TD Bank) - The first quarter's spending is still tracking strongly, at roughly a 4% (annualized) pace, but this impressive pace is mostly driven by revisions. It appears that January's weather-induced spending impulse has faded. Today's tepid growth is borderline flat and could be erased with revisions and a negative print in March. In any case, we expect consumer spending to slow in the second quarter. It's too early to tell whether the bank turmoil will result in a further tightening of consumer credit. But, judging by metrics as recent as February, consumers will face some headwinds as lenders have already reduced credit availability.
U.S. Personal Spending Still Resilient (BMO) - U.S. consumers downshifted in February but not by much, reflecting resilience due to excess savings and lingering pent-up demand. Preliminary auto sales figures suggest some further softness in March. Overall, Q1 GDP growth looks to come in better than expected, though there is still a reasonable chance that consumers and the economy pull back a bit by mid-year. For the Fed, it could be one and done in May.
Personal income rose 0.3% in February (First Trust Portfolios) - Income and spending rose at a moderate rate in February, while inflation remained a problem. The best news in today’s report was that incomes rose 0.3% largely due to a 0.3% increase in private-sector wages & salaries, which outstripped inflation for the eighth consecutive month. Meanwhile, overall consumer spending rose 0.2% in February, due to an increase in services; spending on goods was unchanged.
Revisionist Mystery: Buckle Up for a Blowout in Q1 PCE (Wells Fargo) - A revision to January lifted real spending enough to put PCE on track for an annualized growth rate of 4.5% in Q1. But a slowing in February may be more emblematic of the current state of the consumer. Meanwhile, PCE inflation is still hot enough to warrant another rate hike in May.
Consumers pull back and core inflation cools (EY Parthenon) - Real consumer spending fell 0.1% month over month (m/m) in February after posting in January its strongest advance since March 2021 when stimulus checks buoyed demand. Households pared back their purchases of consumer goods last month, particularly of motor vehicles (-3.9%) and clothing (-1.0%), and spent notably less on hotel stays and restaurant meals (-2.1%). While spending momentum cooled, upward revisions to data in the prior months point to robust consumer spending growth in Q1.
Research US - Upbeat macro data keeps the Fed on a tightening bias (Danske Bank) - Macro and banks' balance sheet data covering the period after SVB's collapse shows that immediate negative consequences to real economy have been modest. The March Jobs Report and CPI will be the final key releases before Fed's May meeting. We see Core CPI at +0.4% m/m, and look for 250k NFP growth.
Canada GDP
Canadian GDP (Jan & Feb adv): Defying gravity (CIBC) - The Canadian economy continued to defy the gravitational pull of higher interest rates at the start of 2023, with monthly GDP data suggesting that the economy is on track for almost 3% annualized growth during Q1. That's a far cry from where consensus forecasts sat at the start of the year, and the numerous calls that a recession was imminent.
Surprise, Surprise (BMO) - There were many indications that the Canadian economy got off to a solid start in 2023, but today's double-barrelled blast of strength is well above even the most optimistic views. Even if growth stalls in March, it now looks like Q1 will post growth of 2.5%, up from a flat read in Q4. While we continue to look for a notable cool down in the next two quarters, we are bumping up our GDP growth estimate for all of 2023 by three ticks to 1.0%. Suffice it to say that if the strength seen in the opening months of the year persists, the BoC is going to find itself in a tough spot.
Canada's economy bounces back in January, points to a strong February (TD Bank) - Canadian economic data keep trending higher. With today's print and the flash estimate for February, GDP is likely going to clock in above 2% (quarterly annualized). This is a big rebound from the 0% growth recorded over the final quarter of 2022. We have been talking about this rebound narrative for quite some time. With employment growth blowing past expectations, alongside massive government income supports, consumers are back to their high spending ways. This has raised the floor for GDP in Canada.
US
Macro Digest: Confusion reigns supreme (Saxo Bank) - The sudden demise of Silicon Valley Bank and ensuing turmoil in banks has laid bare the vulnerabilities of many banks and the risk that rising bank funding costs will impact the credit cycle and bring recession risks dramatically forward. But expectations for both the speed of the incoming economic impact and for the Fed to cut rates already in Q3 looks unrealistic.
U.S. Economy: Resilient, for Now (BMO) - The U.S. economy continues to put up a good fight. Apart from some rationalization in the tech space, companies remain wary of shedding staff with workers so hard to find, keeping initial jobless claims stuck below 200,000. With job prospects the best in decades, consumer confidence seemingly brushed off recent bank stress to turn up in March and remain above long-run norms, at least according to the Conference Board. The University of Michigan’s final read for March had a different take on sentiment, turning down and remaining stuck at recession-like levels, likely because it puts more emphasis on financial matters.
The Calm Before the Storm (Wells Fargo) - This week brought glimpses of market stabilization after weeks of turmoil. Although consumers seem unfazed by the uproar, tighter credit conditions coming down the pipeline will likely weigh on growth. Meanwhile, inflation continues to advance at a stubbornly high pace, adding to the case for a 25 bps hike in May.
Money Market Funds: Any Port In A Storm (Northern Trust) - Money market funds (MMFs) are open-ended mutual funds that invest in liquid, safe assets like U.S. Treasuries and high-rated short-term corporate debt. These funds should not be confused with “money market accounts” that banks offer to consumers, which are FDIC-insured.
Strong Texas job gains encounter economic uncertainty, signs of slowing (Dallas Fed) - Weakness in Texas’ manufacturing sector has been largely offset by modest service sector growth, producing a mixed overall economic picture.
Calibrating central bank inflation messages is key to policy success (Dallas Fed) - Central bank communication is itself a key monetary policy tool. A well-crafted message about the current and future state of the economy can influence the private sector’s expectations and guide behavior to ensure that the economy remains strong and prices stable even amid threatening supply-and-demand shocks.
Global | Turbulence in the banking sector and inflation (BBVA) - The recent financial turmoil in the US and Swiss banking system has exacerbated the already complex monetary policy and inflation outlook, following several years of economic shocks. The central banks have reacted well by separating anti-inflation instruments from financial risk prevention.
Europe
Macro & Markets: Crunch time (Nordea) - Recent events have raised the risk of a credit crunch hitting the economy and also taking care of the inflation problem at the same time. Our baseline remains one of more ECB rate hikes, but higher rates also increase such risks longer out further.
Strikes, Shamrocks, And Systemic Risk (Northern Trust) - SVB’s troubles began when Fed tightening caused the cost of its funding to rise much more rapidly that the yields it was earning on its assets. A significant contributing factor to the imbalance was the erosion of the SVB deposit base, a trend that began in early 2022. Capital available to technology companies began to diminish last year, leading them to draw down their bank balances. SVB’s concentration to this sector made it particularly vulnerable to funding loss.
China
China: Non-manufacturing PMI up in March, manufacturing PMIs down (ABN AMRO) - China Macro: Official non-manufacturing PMI jumps to 12-year high. Manufacturing PMIs down as global demand cools.
Japan
Japan Gets A Raise (Northern Trust) - Shuntō is a Japanese term which translates to “spring wage offensive.” Every year at this time, Japan’s labor unions meet large employers for salary negotiations. Over the past three decades, economic stagnation and deflation led unions to limit their demands; in some years, discussions concluded with no wage increases at all. Japanese employees rarely demand higher pay; Japanese consumers resist paying more; and Japanese businesses seldom try to hike prices. Consequently, Shuntō talks have been losing significance.
Canada
Green Energy Goals, Red Ink Realities (BMO) - The 2023 federal budget is set against a backdrop of still-elevated inflation, disruption in the global financial sector and a likely looming recession. Despite uncertainty on a number of fronts, and a weaker-than-expected underlying budget balance, Ottawa continues to roll out net new stimulus to the tune of $4.8 billion in FY23/24, and $43 billion over six years. That mostly comes through targeted spending and a swath of tax credits aimed at the clean energy sector.
Mexico
Mexico | The Fed will remain focused on reducing inflation, but faces a difficult balance (BBVA) - Last week the Fed raised the federal funds rate by a quarter of a percentage point. I think they did the right thing, although they face a considerable challenge.
Inflation
Inflation worries moving up the agenda again (Danske Bank) - We continue to see large volatility in money and bond markets, as market participants struggle to assess the future path of interest rates with banking uncertainty on the one hand and data mostly pointing to continued high core inflation on the other. Fed data showed the second weekly decline in a row in US banks' use of liquidity measures, but worries persist over especially regional banks, as well as over what effect the rise in interest rates may have on commercial real estate, which again could affect the wider financial system. Our expectation is that these concerns will gradually fade and that central banks will hike interest rates further, but we also recognise that visibility is low.
Euro-area inflation: lower but stickier (Nordea) - Inflation drops sharply on base effects from energy price increases in March last year, while core inflation continues to increase driven by higher service price inflation, which will keep the ECB worried about the stickiness of inflation.
Energy
OPEC+ shocks market with supply cuts (ING) - A handful of OPEC+ members surprised the market over the weekend by announcing further voluntary cuts amounting to around 1.66m b/d from May to December 2023. These surprise cuts mean a tighter market this year. As a result, we have had to revise higher our oil forecasts for the remainder of 2023.
The climate of uncertainty (CIBC) - Winston Churchill called democracy the worst political system, except for everything else that’s been tried. One of its hallmarks is that the people have the right to change their minds. They can then choose a new party to govern them, or the governing party can alter its own stance to keep pace with voters. But there are times when that flexibility stands in the way of giving enough certainty for long term investment decisions to be effectively made, and that’s what’s at stake in Canada’s drive to meet its
commitments on climate change.
Markets
Q1 earnings, valuation, and positive March despite banking crisis (Saxo Bank) - There is nothing like a heavily concentrated equity market. March brought on a banking crisis and tighter credit conditions which will be felt in the months to come, but these events also triggered lower bond yields and a market pricing the Fed to cut the policy rate by 60 basis points by January 2024. These moves in bonds coupled with excitement over GPT 4 have ignited a speculative fever and buy-the-dip dynamics across technology stocks pushing the overall equity market into gains for the months.
The Longest Month (BMO) - After a tumultuous month and a comeback week, equity markets find themselves higher today than at the start of March. Beyond modest monthly gains, the MSCI World Index managed to grind out a 5% advance for all of Q1. As one sly commentator suggested, markets believe things will be so bad that the Fed will need to cut rates in the second half of the year, yet not so bad as to prompt investors to sell stocks. Amid this week’s much-improved market mood, the pressing question is whether this is the calm after the storm, or perhaps the eye of the storm? It certainly appears that the acute phase of the banking stress is behind us, but now we await the potential after-shocks, notably through the credit channel.
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