Strong Service Sector Growth in May Amplifies Inflation Concerns Across Global Economies
Economic news and commentary for June 5, 2023
S&P Global Services PMIs
Asia Pacific
• India: 61.2 (Apr 62.0)
• China: 57.1 (Apr 56.4)
• Japan: 55.9 (Apr 55.4)
• Russia: 54.3 (Apr 55.9)
• Australia: 52.1 (Apr 53.7)
Europe
• Germany: 57.2 (Apr 56.0)
• Spain: 56.7 (Apr 57.9)
• UK: 55.2 (Apr 55.9)
• Italy: 54.0 (Apr 57.6)
• France: 52.5 (Apr 54.6)
The service sector expansion continues going into the final month of the second quarter. Growth was strongest in the Asia Pacific region and was lead by India and China where the rise in activity was speedy and mostly comparable to the previous month. China, specifically, continues to see momentum gather behind reopening effects as consumers enjoy a year free of pandemic restrictions. Chinese companies’ optimism was fueled by the second-sharpest increase in activity since 2020 and another month of improvement in export business. In India, services output was the second-fastest pace in the last 13 years which contributed to a robust expansion in output prices which were the joint-highest since 2017. Japan, Russia, and Australia all saw expansions in their services sector as well, but the prosperity was only moderate. As one would expect, strength in services has inflation fears lingering. Selling price inflation was up to a 3-month high in Australia, and Japanese selling prices expanded for 13 months in a row.
Inflation concerns in Europe have also been supported by another strong month in local services sectors. Germany came out on top with the highest reading in May at 57.2 beating out robust expansions in Spain (56.7) and the UK (55.2) and reaching a 13-month high. Activity growth has reversed from the lows seen in 2022 to new highs in 2023 especially growth in foreign sales which was the highest on record. Hearty demand allowed businesses to increase the rate of selling price inflation, and in May 2023, it was higher than at any point before November 2021. The trend of rising output prices even if input prices were falling was evident across European countries. According to the Eurozone Services PMI, operating cost growth was the slowest since August 2021, but despite that, firms’ price setting rose at a quicker pace than in April.
The May PMIs point to another month of troubling inflation dynamics. While goods sectors are seeing pessimism and deflation, services sectors are keeping the general level of prices sticky as a result of strong demand. While this may be good for growth in the near term, it likely means that the ECB will tilt more hawkishly over the next 12 months. Services firms seem to acknowledge the monetary policy situation. Despite strength in demand and production, the level of positive sentiment fell to the weakest seen in 2023 so far in the Eurozone.
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
12:30 pm - US Investor Movement Index
7:30 pm - Japan Household Spending
Morning Reading List
Other Data Releases Today
Germany's trade balance improved to €18.4 bil in April with exports up 1.2% MoM and imports down -1.7% MoM. Imports are down a sharp -10.3% YoY as domestic demand remains muted. Exports remain healthy thanks to trade with the US, up 4.7% MoM.
Euro area PPI fell -3.2% MoM and was only up 1.0% YoY in April, down from 5.5% YoY in March. Ex-energy PPI was only down -0.1% MoM & up 5.1% YoY. Energy PPI fell -10.1% MoM. Durable & non-durable consumer goods prices edged up on the month.
German Trade
German export rebound in April is too small to make us happy (ING) - After the collapse of German exports in March, the rebound in April may seem like good news, but in fact, the recovery was too weak to bring real relief. And there are very few signs of a more robust rebound in the coming months.
US Employment
US Employment gain buttresses case for a Fed hike by July (CIBC) - Hiring roared ahead in the US in May, as 339K jobs were created, well above the 195K consensus expectation, and a +93K revision to the prior two-month job tally added to the upside surprise. The hiring was relatively broad based, but that contrasted with a 310K drop in jobs that was reported by the household survey, which resulted in the unemployment rate rising by three ticks to 3.7% (vs. 3.5% expected).
May Employment: Survey Says? (Wells Fargo) - Nonfarm payroll growth blew past expectations in May, increasing by 339K compared to a Bloomberg consensus forecast of 195K. Upward revisions to the previous two months further flattered the headline reading. Yet, the separately derived household measure of employment told a much different story, signaling a 310K decline in employment.
U.S. Adds 339,000 Jobs in May (NAHB) - Job growth accelerated in May. Total payroll employment rose by 339,000 and the unemployment rate rose to 3.7%. While labor demand remained strong, wage pressures eased from a year ago. In May, wage growth slowed to a 4.3% year-over-year gain, from 4.4% last month, and down 1.6 percentage points from a 5.9% gain in March 2022.
Nonfarm Payrolls Increased 339,000 in May (First Trust Portfolios) - If you have followed our recent reports on the US labor market the main theme has been ambiguity, and the data in May was no different. Once again, we have a report on the labor market with solid headlines but worrisome details.
US
The U.S. Avoids Default (Wells Fargo) - This week, Congress and the president prevented what would have been the first default in U.S. history by agreeing to suspend the debt ceiling through the end of 2024. Despite a bewildering jobs gain that defied market expectations, data on balance continued to suggest that economic activity is slowing, albeit gradually.
District banks meet challenging times from position of strength (Dallas Fed) - Texas banks confront an increasingly challenging operating environment, as the state’s usually strong economic growth is predicted to slow later this year and the Federal Reserve’s rapidly rising interest rate environment pressures banks’ deposits and profitability.
Europe
Inflection point: Why lower core inflation is key to Europe’s economic and financial outlook (S&P Global) - Core eurozone inflation rates, while still elevated, are beginning to moderate. Various metrics that we track are indicative of further declines ahead.
Strong service sectors and weak manufacturing (Danske Bank) - According to PMIs, economies have continued to strengthen in May and the picture of a two-speed economy has become clearer. Globally, manufacturing continues to struggle, in particularly in the euro area where the manufacturing contraction intensified in May, not least driven by Germany.
Macro & Markets: Latent lags (Nordea) - Economic indicators are currently telling many different stories. We continue to believe in one where inflation proves to be relatively sticky, meaning that central banks have more work to do. Also clearer downside scenarios have emerged, though.
Softer inflation prints drive yields lower (Danske Bank) - Hopes for inflation coming down faster than expected drove market sentiment towards the end of the week. The euro area inflation print released on Thursday confirmed the disinflationary prints from country releases in previous days. HICP came in at 6.1%, which is a sharp drop from 7% in April.
NO Inflation Preview: Lower headline but more upside for core (Nordea) - We expect headline inflation to fall due to lower energy prices, however, core inflation will likely rise further. We still expect Norges Bank to raise the key rate to 4% by September.
Spain | The labor market reform in perspective (BBVA) - The labor market reform approved at the end of 2021 has had clear effects. Increased restrictions on the use of temporary contracts and greater flexibility in the use of permanent contracts, especially those for permanent seasonal employees, have reduced temporary employment in the private sector.
Turkey: Headline inflation down, but services remain sticky (ING) - The downtrend in annual inflation continued in May as widely expected, falling to 39.6%. This was due to strong base effects and natural gas subsidies provided by the government.
Canada
A hawkish hold from the Bank of Canada next week (ING) - We expect the BoC to leave the policy rate at 4.5% next week, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust we cannot rule out a surprise interest rate increase. The market is pricing a 25% chance of a hike on 7 June, and a hawkish hold should be anough to keep the Canadian dollar supported.
A warning now, a speeding ticket next time? (CIBC) - America has stayed miles from an outright recession, one we didn’t think would be entirely necessary to
make decent progress against price pressures. But even the stall in growth we did see as a pre-condition to returning to the 2% inflation target has failed to materialize through the first half of 2023. In Canada, a weak second half in 2022 was been followed by a pick-up in growth in the first quarter of 2023, and April
figures point to at least moderate growth in the spring.
Inflation
Global | Inflation and Bottlenecks Chartbook April 2023 (BBVA) - Headline inflation eased further in the US in April, while May data for the Euro Area showed price pressures eased after having picked up in April. That said, core inflation remains sticky overall. In contrast, inflation slowed markedly in China.
Estimates of Cost-Price Passthrough from Business Survey Data (Cleveland Fed) - We examine businesses' price-setting practices via open-ended interviews and in a quantitative survey module with business contacts from the Federal Reserve Banks of Atlanta, Cleveland, and New York in December 2022 and January 2023. Businesses indicated that their prices were strongly influenced by demand, a desire to maintain steady profit margins, and wages and labor costs.
How Do Firms Adjust Prices in a High Inflation Environment? (Liberty Street Economics, NY Fed) - How do firms set prices? What factors do they consider, and to what extent are cost increases passed through to prices? While these are important questions in general, they become even more salient during periods of high inflation.
The Global Economy Is Suffering From Long COVID (Northern Trust) - In the near term, economies are still recovering from the demand and supply shocks created by the pandemic. The inflation that resulted from the two forces has necessitated more restrictive monetary and fiscal policy around the world. Rapid increases in interest rates have proven difficult for borrowers and contributed to an outbreak of banking stress earlier this year. A higher yield environment may also eventually stress the solvency of some emerging markets.
Emerging Markets
Sovereign Default Risks Exist Outside The U.S. Too (Wells Fargo) - While we remain constructive on emerging market currencies, sovereign default risks represent a tail-risk to our outlook, and should defaults materialize and gather momentum, our outlook could change over time.
Markets
New Innovations and Global Trends Boost Case for Artificial Intelligence and Robotics (First Trust Portfolios) - Recent developments in artificial intelligence (AI) have captured the attention of investors and the media alike, drawing comparisons to other major disruptive technologies, such as the Internet or the smart phone. Below, we discuss some of the underlying factors that have contributed to the growing excitement surrounding AI, highlighting a few specific use cases. We also explore some of the trends impacting robotics, AI’s physical counterpart. In our view, the First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT) and the First Trust Nasdaq-100-Technology Sector Index Fund (QTEC) are two compelling options for gaining exposure to these
emerging trends.
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