Flash PMIs to signal underwhelming economic momentum

Emily Nicol

After a positive session in Europe and the US yesterday, Asian equities maintained an upward trend today taking further encouragement from reports that senior US trade representatives would travel to China next week to resume high-level negotiations for the first time since talks were halted in May. So the main Chinese CSI 300 equity rose 0.6% today. And with a modest improvement in Japan’s flash manufacturing and services PMIs in July (see below for more detail), the Topix closed 0.4% higher. Ahead of tomorrow’s ECB meeting, July’s flash PMIs will be the main data focus in the euro area today, although like in Japan these seem likely to be consistent with underwhelming economic momentum at the start of Q3. And in the UK, markets are likely to remain jittery as populist Brexiter Boris Johnson will be officially appointed as the new UK Prime Minister and unveil his choices for prominent Cabinet positions.

With recent data suggesting that Japan’s economy might well have avoided a contraction in Q2, today’s flash manufacturing and services PMIs for July suggested that despite a modest improvement this month, economic momentum remained largely underwhelming at the start of the third quarter. Certainly, the manufacturing survey suggested that conditions in the sector remained particularly challenging, with the headline index (49.6) recording the fifth sub-50 reading out of the past six months despite rising 0.3pt in July. And although the respective output PMI rose 0.6pt to 49.1, it was the seventh successive reading in contractionary territory. The survey suggested that new orders continued to decline, albeit at a slightly softer pace than in June, with ongoing weakness in demand for Japanese goods from China. Despite the downbeat outlook, manufacturers reportedly increased their workforces at a faster rate in July, with the relevant PMI at a three-month high of 51.3.

In comparison to the manufacturing survey, the services PMI has remained remarkably stable over the past year or so. And this trend was maintained at the start of Q3, with the headline activity index rising 0.4pt to 52.3, the joint-highest reading since October 2018 and consistent with moderate expansion in the sector. As such, the composite PMI also rose by 0.4pt in July to 51.2, its highest since December. But the near-term outlook remained more clouded, with the composite new orders PMI declining 0.2pt to 51.0, a six-month low, suggesting that a marked acceleration in economic activity over coming months seems unlikely.

The survey’s price indices were more downbeat about the outlook for inflation too, with the composite output price PMI declining for the second successive month to 50.6, its lowest level for two years. And the input price PMI suggested that pipeline pressures were waning too, with the relevant index similarly at a near-two-year low. So, yesterday’s report suggesting that the BoJ’s Policy Board will revise down its core CPI forecast for FY19 (from 1.1%Y/Y) when it publishes updated economic projections at its meeting next week seems credible to us. Although given the BoJ’s usual tendency for optimism, any downwards amendment seems likely to be modest.

Euro area:
While the Commission’s flash consumer confidence indicator yesterday posted a surprise pickup in July, today’s flash manufacturing and services PMIs seem unlikely to signal a similar improvement in business conditions at the start of the third quarter. Admittedly, in June, the euro area services PMI edged up to an eight-month high (53.6). But the equivalent index for manufacturing weakened a little to remain firmly in contractionary territory (47.6). So, while the composite PMI rose to its highest level since October, at 52.2 it remained consistent with subdued economic growth. And, not least given the challenging external environment, the PMIs are expected to be little changed in July, suggesting that economic momentum remained underwhelming at the start of Q3. The equivalent PMIs for Germany and France are similarly expected to signal subdued growth in July, with Germany’s manufacturing sector likely to have remained a particular source of weakness at the start of Q3.

This morning has already seen the release of the French INSEE’s business survey, which showed that that the headline confidence index edged lower in July, by 1pt to 105, albeit still comfortably above the long-run average and the recent lows seen at the start of the year. But the manufacturing sector was again a source of weakness, with the headline index declining 1pt to 101, a more than four-year low, with a further notable decline in new orders, with the relevant index similarly at its lowest level since mid-2015. Meanwhile, the headline services indicator reversed the 1pt improvement seen in June to leave it at a still-healthy 106, while the equivalent retailing component rose 1pt to a three-month high of 105. And conditions in the construction sector were assessed to be little changed, with the relevant index unchanged at 111 for the sixth consecutive month.

Elsewhere, while yesterday’s ECB quarterly Bank Lending survey suggested that credit standards unexpectedly tightened in the second quarter, today’s bank lending figures for June are likely to indicate continued solid lending growth to households and business alike at the end of the quarter.

Politics will continue to dominate the UK news flow, as Theresa May will formally resign after taking questions in the House of Commons for the final time and Boris Johnson will be subsequently invited to become the new Prime Minister. Focus in particular will be on Boris’ choices for the prominent Cabinet positions and for any insight into his strategy of how he plans to deliver Brexit by 31 October.

In the US, this afternoon will bring a further update on the housing market, with new home sales figures for June set to rise after notable declines in the previous two months, not least taking support from lower interest rates. The flash Markit manufacturing and services PMIs for July are also scheduled for release. In the markets, the US Treasury will sell 2Y floating-rate and 5Y fixed-rate notes.

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