Services PMI signal significant slump

Emily Nicol
Chris Scicluna

Despite yesterday’s better end to the day on Wall Street, most Asian equity markets ended the week on a soft note while oil prices continued to give up some of yesterday’s gains on confusing signals regarding the possibility of future production cuts.

While Japan’s government firmed up its plans for hand-outs of ¥300k to households along with other fiscal support measures to be confirmed next Tuesday, and the country’s services PMI was surprisingly revised up from the flash survey, rising concerns about the spread of Covid-19 certainly continued to weigh on market sentiment. So, the Topix more than reversed its early gain of 1.5% to close down 0.4% on the day and more than 9% over the week.

Elsewhere, as China’s Caixin services PMI contradicted the official survey by remaining firmly below CSI300 was down 0.6% to reverse almost of the gains achieved earlier this week. In Hong Kong, where bars will be shut for a fortnight from this evening, the Hang Seng was also down about ½% at the time of writing to be down more than 1% on the week. And Aussie stocks unsurprisingly were unimpressed by a stronger-than-expected retail sales report.

Bond markets, however, were relatively little changed. For example, yields on 10Y USTs remain just below 0.60%, yields on 10Y JGBs were near -0.015%, while shorter-dated JGBs shrugged off the decision of the BoJ to reduce its purchases of 1-3Y paper in its latest operation. But euro area government bonds are largely firmer this morning, with the region’s equity markets opening lower, as the Spanish services PMI just released unsurprisingly signalling a record plunge in activity. More on this, and today’s other economic data, below.

While the number of confirmed coronavirus cases in Japan has more than doubled over the past week to more than 2500, and Tokyo Governor Koike again requested that people again remained indoors in the capital this weekend, the final services PMI for March today posted a modest upwards revision. In particular, the headline business activity index was revised up by more than 1pt from the flash estimate, nevertheless still leaving the PMI at a dismal 33.8, a drop of 13pts from February and its lowest reading since February 2009. Despite the slightly ‘improved’ outturns compared with the preliminary readings, the detail of the report remained downbeat too. For example, firms assessed new orders to be the lowest since the 2011 quake, while business expectations were the weakest since the global financial crisis. And so, firms in the sector reportedly scaled back their workforces by the most since mid-2016.

Overall, while the composite PMI was not as bad as initially reported, it was still very weak, at 36.2 (a drop of almost 11pts on the month). And the new orders and expectations of future output components point to further deterioration ahead. Against this backdrop, today’s survey showed diminishing price pressures, with the output price PMI down almost 4pts to 46.4, the weakest since mid-2012.

Meanwhile, rather academically perhaps, the BoJ today published its output gap estimate for Q4. Given the sharp contraction in GDP (-7.1%Q/Q annualised) in the aftermath of the consumption tax hike, the BoJ cut its estimate of the output gap to 0.7% of GDP, down from a peak of 1.9% in Q418 and the smallest positive reading since Q317. Admittedly, this compares with a notably weaker estimate from the Cabinet Office, which estimated a negative output gap of 1½% in Q4, the largest for seven years. And, of course, if the Covid-19 outbreak in Japan eventually follows the path in Europe and the US, the output gap will be anyone’s guess. But, by the same token, that will also be the last of anyone’s concerns.

While the Chinese government’s official non-manufacturing PMI published earlier in the week posted a remarkable increase in March (up 22.7pts to 52.3 to signal a return to growth in the sector), today’s private sector Caixin services PMI implied a more underwhelming recovery. In particular, the headline index rose 16.5pts to 43.0, still firmly in contractionary territory and the second-weakest reading since the series began in 2005. Indeed, over the first quarter as a whole, the Caixin services PMI averaged just 40.4, a drop of more than 12pts compared with the Q4 average. And despite rising almost 23pts on the month, the new orders component also implied ongoing significant contraction ahead.

Overall, the Caixin composite PMI jumped more than 19pts in March, albeit not fully reversing the slump seen in February, to a still weak 46.7. This left the quarterly index at just 42.0, a drop of more than 10½pts from the Q4 average and consistent with significant contraction over the first quarter as a whole. Indeed, the current expectation for Q1 GDP (due to be published on 17 April) is for a quarterly decline of 12%Q/Q, which would leave annual growth down more than 4%Y/Y.

At face value, today’s Australian retail sales figures published by ABS were stronger than expected, with the total value of sales up 0.5%M/M. But this followed two months of declines, to leave the annual rate of increase (1.8%Y/Y) the softest since late 2017. And despite the pickup in February, sales were still on average in the first two months of Q1 down 0.2% compared with the Q4 average. Furthermore, the detail suggested some evidence of an initial Covid-19 impact, with sales at food stores rising at the fastest monthly pace for almost two years, and the ABS noting a significant increase in supermarket purchases of essential grocery items. While department store sales were firmer, there was another notable drop in clothing sales. And we would expect spending on non-essential items to fall significantly further in March as concerns about the economic outlook worsened.

Euro area:
The euro area economy is undoubtedly undergoing a contraction of historical magnitude for peacetime – we fully expect a peak-to-trough percentage decline in GDP well into the double-digits. As illustrated by yesterday’s Spanish jobless claims data, the drops in economic activity in Italy and Spain appear to be extraordinarily severe, with many services sub-sectors are taking the brunt of it. Indeed, Spain’s services PMIs for March, just released, were even weaker than the extremely pessimistic expectations. The headline PMI fell more than 29pts to just 23.0, with the survey detail also reporting the steepest fall in overall new business in the survey’s history. Markit noted – unsurprisingly – that the hospitality subsector was affected particularly harshly, and that financial firms were the only ones to report any pickup in activity last month.

The final euro area March services PMIs due alter this morning are bound to confirm a record decline in the euro area headline index too. The flash estimate fell a whopping 24pts to just 28.2, well below the lows seen during the global financial crisis. And unlike the Japanese survey, we would expect to see a downwards revision to reflect the escalation of the crisis over recent days. The weakness was unsurprisingly matched in the flash German and French PMIs. And the publication of the Italian services PMIs for the first time will likely closely resemble the Spanish indices, given the horrific impact of COVID-19, which has so far caused more than 13k deaths.

In terms of the less timely data, today will also bring euro area retail sales figures for February, which in light of Wednesday’s strong German release seem likely to post another month of solid growth supported by household stock-piling of food, pharmaceuticals and other hygiene products.

As we expect for the euro area, UK economic output is also undergoing a peak-to-trough drop of significantly more than 10%, with many services sub-sectors simply shutdown. And so, as we saw in Wednesday’s manufacturing PMIs, we expect today’s final UK services survey to show an even sharper decline than the record drop in the headline measure reported in the flash estimate (down 17pts to a series low of 35.7). As such, the final composite PMI will also sink further from the flash estimate of 37.1.

In the US, after yesterday’s shocking jobless claims data, today's non-farm payrolls report will be inevitably be watched. And expectations are for a marked decline this month for the first time since 2010. But the BBG median forecast is for a fall of 100k, with the extent of the drop tempered by the reference period, which is the week containing the 12 March. So, the April payroll data to be released early next month will provide a much more reliable indication of the impact of Covid-19 on the labour market. Nevertheless, the unemployment rate is expected to rise, albeit perhaps by just 30bps to 3.8%.

Today will also bring the US non-manufacturing ISM and final services PMIs for March. Last week’s flash estimates showed a marked decline in the headline services PMI by more than 10pts to 39.1. And with the coronavirus crisis having intensified over the past week, we would expect these declines to be even steeper.

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