Services Expansion Slows in Most Developed Economies, India and China Maintain Strong Growth
Economic news and commentary for August 3, 2023
S&P Global Services PMIs
Asia Pacific
• India: 62.3 (Jun 58.5)
• China: 54.1 (Jun 53.9)
• Russia: 54.0 (Jun 56.8)
• Japan: 53.8 (Jun 54.0)
• Australia: 47.9 (Jun 50.3)
Europe
• Ireland: 56.7 (Jun 56.8)
• Spain: 52.8 (Jun 53.4)
• Germany: 52.3 (Jun 54.1)
• UK: 51.5 (Jun 53.7)
• Italy: 51.5 (Jun 52.2)
• France: 47.1 (Jun 48.0)
The global services expansion is down but not out according to the latest round of PMIs from S&P. Despite most developed nations seeing a decline in the index, most maintained the growth albeit at a slower pace than before. There are a select few economies that stand out as weathering the storm of tighter financial conditions worldwide. India sticks out as a major outperformer compared to its peers as its July PMI reading jumped 3.8 pts to 62.3. While other countries are barely sustaining growth, new services activity expanded at the fastest rate in over 13 years. Interestingly, strong export order growth was also evident despite broad-based growth slowdowns in developed nations in Europe, Asia Pacific, and the Americas. That index increased to the highest level since September 2014.
Robust growth was also seen in China and Russia, up 0.2 pts to 54.1 and down -2.8 pts to 54.0 respectively. Russia continues to be a curious case since its PMIs have sustained growth despite being engaged in a war with Ukraine that has caused severe economic sanctions to be put in place against it (though those sanctions have eased somewhat compared to the initial response). Nevertheless, it did see a substantial decline in services demand in July as new order growth fell below the long-term average. China’s services growth was similar to Russia, but it did see a slight acceleration in July. Domestic demand boosted services activity in China since export order growth was the slowest in the last 6 months. Firms were optimistic enough to hire at the fastest rate in 4 months. In general, services activity is the only thing maintaining Chinese growth as the manufacturing sector has been sluggish in 2023.
In Europe, the services expansion continued in most economies, but there was a broad deceleration in the pace of growth. Italy, Spain, Germany, and the UK all reported declines in the PMI readings, and none are above the 53 level now. France is the only European economy reporting a contraction in the services sector and it deepened in July, down -0.9 pts to 47.1. The reduction in demand for French services was the third in a row and the sharpest drop in the last two and a half years. More broadly, the Eurozone Services PMI fell to a 6-month low of 50.9. The good news is that the weakening of services growth leads to softer inflation across all European economies. There was a broad cooling of price pressures since June, although rates of input cost and output price inflation were only fractionally weaker than seen in June and therefore remained historically strong.
Still to come…
9:45 am (EST) - US S&P Global Services PMI
10:00 am - US ISM Services PMI
10:00 am - US Factory Orders
10:30 am - US EIA Natural Gas Report
11:00 am - World S&P Global Services PMI
4:30 pm - Fed Balance Sheet
Morning Reading List
Other Data Releases Today
Australia's trade balance grew to $11.3 mil in June with exports down -1.7% MoM and imports down -3.9% MoM. General merchandise exports fell a further -2.8% MoM while services exports grew 2.1% MoM. Goods imports tanked -5.5% MoM.
The Bank of England increased its Current Bank Rate by 25 bps to 5.25% by a vote of 6-3 (two members opted for a 50 bps hike and one opted for a pause). The BoE also increased its medium-term inflation forecast as it chose to "bring some of the upside risks to inflation from persistence into its modal projection." For the future, the BoE remains data-dependent and will wait for more "evident of persistent pressures" to decide if further hikes are needed.
US firms cut just 23,697 jobs in July, down -42% MoM. This is the first time this year that job cuts were lower than a year ago (-8% YoY). So far in 2023, job cuts are up 203% over 2022 but the rate of job cuts has slowed substantially in the last two months.
Euro area PPI fell -0.4% MoM and -3.4% YoY in June, down from -1.6% YoY in May. PPI ex-energy was up 2.5% YoY but that was down from 3.3% YoY prev.
Capital and consumer goods producer prices were largely unchanged but were up 5%+ YoY.
Jobless claims fell -7,000 to 221,000 last week. The insured unemployment rate fell -0.1 ppts to 1.1%. Continued claims fell -59,000 to 1.7 million.
Labor productivity improved 3.7% QoQ in Q2 2023 as output increased 2.4% QoQ and hours worked fell -1.3% QoQ. Despite hourly compensation growing 5.1% QoQ, unit labor costs were only up 1.3% QoQ (down from 2.9% QoQ in Q1 2023). On a YoY basis, unit labor costs were only up 2.2% YoY, down from 3.6% YoY in Q1 2023 and down from the peak of 7.1% YoY in Q2 2022.
Germany Trade
German exports still stuck in stagnation (ING) - After the post-lockdown volatility, German exports have entered a new phase. A phase of stagnation.
US
An oddly timed U.S. rating downgrade (DWS Group) - From both a market and a political perspective, the “news” that Fitch now rates United States' long-term ratings as 'AA+' contained no new information and is likely to have very little direct market impact.
Wage growth still exceeds 3 percent despite slowing in business survey measures (Dallas Fed) - Fed policymakers working to reduce inflation have closely monitored how fast wages have risen. The rate of wage growth exceeded 5 percent in 2022 amid a rapid recovery from the COVID-19 pandemic and extremely tight labor market conditions. Wage growth seems to be cooling this year but remains well above the 3 percent pace of 2019. If trend productivity growth is still around 1 percent, wage growth will eventually need to slow to around 3 percent to be consistent with 2 percent inflation in the long run.
U.S. vehicle sales remained solid in July (TD Bank) - Light vehicles sales in July were 18.2% higher year-on-year, but still roughly 7.3% below the pre-pandemic pace for July. Continued improvements in production have allowed inventory levels to rise 56% y/y, bringing the days’ supply of light vehicles to 36 in June. While this represents a notable improvement relative to year-ago levels, it remains well below the pre-pandemic average of 60-70 days' supply. Still, the marked uptick in supply, particularly among more affordable models, has underlined this year's strength in sales.
US Dollar Credit Supply: Revising our forecasts marginally higher (ING) - We revise our USD corporate supply forecast upwards to US$650bn for 2023. In addition, we increase our corporate Reverse Yankee supply to €45bn on the back of heavier supply than anticipated in the first half of this year.
Europe
Euro Credit Supply: Revising our forecasts marginally higher (ING) - On the back of higher supply than initially expected, we revise our corporate supply to between €270bn and €300bn, our covered bond supply to €185bn, and our Reverse Yankee supply to €45bn.
CEE: July indicates a change in bond supply (ING) - The first half of the year indicates a possible reduction in bond supply in the Central and Eastern European region. On the other hand, governments are facing problems on the fiscal side and are looking for solutions to keep this under control. For now, we do not see significant problems anywhere and issuance should remain supported by strong demand.
Turkey sees record high CPI inflation in July (ING) - With a near double-digit monthly increase, annual inflation jumped again in July, ending a deceleration phase which started in October.
China
Weak start to third quarter for China as PMI signals divergent sector growth and inflation trends (S&P Global) - PMI survey data from S&P Global and Caixin showed the mainland Chinese economy losing growth momentum at the start of the third quarter. A renewed manufacturing downturn was accompanied by relatively subdued service sector growth compared to earlier in the year. There were nevertheless some brighter aspects to the survey to counter the gloom, with manufacturing optimism lifting higher and service sector new business inflows growing at a faster rate than June.
China is no 1990s Japan - but it could have been (ING) - Talk of deflation for China is well wide of the mark, and obsessing over historical growth rates misses the point that 5% growth is sustainable and about the right pace of growth for an economy of China's stage of development.
Real Estate
Unaffordable Prices & Bidding Wars Hold Buyers Back (NAHB) - An earlier post revealed that 69% of buyers who were actively engaged in the process of finding a home in the second quarter of 2023 have spent 3+ months searching for a home without success. The inability to find an affordable home remains the most common reason buyers looking for 3+ months can’t make a purchase, cited by 38% (although that is down from 45% in the final quarter of 2022).
Homeownership Rates for Households Aged Under 35 Fell to 38.5% (NAHB) - The Census Bureau’s Housing Vacancy Survey (CPS/HVS) reported the U.S. homeownership rate at 65.9% in the second quarter of 2023, amid persistently tight housing supply. The homeownership rate remained statistically unchanged from the first quarter reading (66%). Compared to the peak of 69.2% in 2004, the homeownership rate is 3.3 percentage points lower and remains below the 25-year average rate of 66.4%.
Research
A New Look at the Effects of Weather Shocks Over Time (Richmond Fed) - This article examines the relationship between severe weather shocks and the U.S. macroeconomy from 1963 to 2019, applying a novel empirical approach to high-frequency data. We find weather shocks are growing in their influence on key economic variables, such as industrial output, unemployment and inflation.
On the Origins of the Federal Reserve System and Its Structure (Cleveland Fed) - The creation of the Federal Reserve System ultimately stemmed from fundamental changes in the banking industry that heightened the risks associated with shifts in the public’s liquidity preferences and that created an atmosphere of distrust between the small, traditional, country banks and the large, transforming, Wall Street banks. The severity of the Panic of 1907 became the proximate factor in the Federal Reserve’s formation.
How to Construct Monthly VAR Proxies Based on Daily Futures Market Surprises (Dallas Fed) - It is common in applied work to estimate responses of macroeconomic aggregates to news shocks derived from surprise changes in daily futures prices around the date of policy announcements. This requires mapping the daily surprises into a monthly shock that may be used as an external instrument in a monthly VAR model or local projection.
Global Transportation Decarbonization (Dallas Fed) - A number of policy proposals call for replacing fossil fuels in the name of decarbonization, but these fuels will be difficult to replace due to their as-yet unrivaled bundle of attributes: abundance, ubiquity, energy density, transportability and cost. There is a growing commitment to electrification as the dominant decarbonization pathway for transportation.
Lending by Servicing: Monetary Policy Transmission Through Shadow Banks (Dallas Fed) - We propose a new conceptual framework for monetary policy transmission through shadow banks in the mortgage market that highlights the role of mortgage servicing in generating non-deposit funds for lending. We document that mortgage servicing acts as a natural hedge against interest rate shocks and dampens the effect of monetary policy on shadow bank mortgage lending.
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