PMIs point to modest improvement

Emily Nicol
Chris Scicluna

With Trump having continued to rail at China, and the latest FOMC minutes having underscored the Fed’s lack of confidence in the economic outlook and illustrated its struggles to communicate clearly on the possible next steps for policy, Asian stock markets were largely uninspired today, mostly recording a mix of small gains and losses.

While Japan’s authorities signalled that the state of emergency in Osaka is set to be lifted shortly in Osaka (but not Tokyo, its neighbours, or Hokkaido), the Topix was in the losing camp, albeit closing down just 0.2%, as the May flash PMIs and April trade data pointed to an economy that continues to contract sharply (see detail below).

Elsewhere, US and European equity futures are down too. And USTs (10Y yields down to 0.66%), JGBs and most euro area government bonds are a touch firmer ahead of the release of the European flash PMIs, which are also likely to signal ongoing extreme weakness in economic activity. Looking further ahead to the US, the usual weekly claims numbers will be watched for a further slowing in the rate of joblessness, while Jay Powell will speak publicly again.

Unsurprisingly, the May flash PMIs suggest that Japan’s economy continues to contract sharply. Indeed, the manufacturing PMIs deteriorated further this month, with the output index down 3pts to 31.7, the lowest reading since the height of the global financial crisis. Likewise, the indices for total new orders (down more than 7pts to 25.9), and new export orders (down 3pts to 30.0) declined further, to suggest that weak domestic demand is taking its toll on the sector just as much as the hit to external demand.

Somewhat less discouragingly, the services PMI picked up from April’s series low, probably reflecting the easing of the state of emergency in most prefectures. But the rise of less than 4pts left it at a still extremely low 25.3. And while that helped the composite output PMI to rise 1.6pts, the May reading of 27.4 was still by some margin the second-weakest reading on the series and still suggestive of an economy that is shrinking at a double-digit percentage rate in Q2. The same is true of the composite new orders index (up just 0.6pts to 28.3). And among other detail on the survey, employment reportedly fell at the fastest rate since early 2010 while downwards pressure on both input and output prices still dominated.

With the restrictions introduced in many major economies to control the spread of the pandemic having reached their most stringent during April, today’s goods trade report for that month was predictably dire. Indeed, the trade deficit widened to ¥996bn, the largest for more than 6½ years, as the value of exports slumped almost 10½%M/M – the most since the height of the global financial crisis – but the value of imports was little changed. Indeed, exports were down 21.9%Y/Y, the most since autumn 2009, to leave them down compared with a year for the seventeenth consecutive month, the longest negative run since the 1980s.

Within the detail, the weakness was inevitably most evident in shipments to the US and EU where the lockdown measures were tightest last month. For example, exports to the US fell a whopping 37.8%Y/Y – the most since June 2009 – while exports to the EU fell 28%Y/Y. And while there was a weakening in demand for Japanese goods across the board, the most significant hit was seen in the autos sector, with shipments of cars to the US down 66%Y/Y and those to the EU down 57%Y/Y, as sales dried up. While they account for a relatively small share, exports to Australia were also down more than 45%Y/Y, and exports to most Asian countries continued to decline at a double-digit year-on-year rate. The exception was China, which saw the annual rate of decline ease to just 4.1%Y/Y, as firms started to resume activity and consumers tentatively returned to the shops as lockdown measures eased.

When adjusting for seasonal and price effects, the BoJ’s series offered an even more downbeat assessment of the export performance, with volumes down a steep 14.2%M/M, the most since January 2009 and to the lowest level since the 2011-quake. And with import volumes up 4.0%M/M in April, today’s release suggests that net goods trade provided a significant drag on GDP growth at the start of Q2. Furthermore, the slump in overseas visitor numbers (down 99.9%Y/Y in April to just 2,900) will have a marked negative impact on services exports too, further exacerbating the negative drag on overall growth. 

The flash PMIs from Australia offered a similar assessment to the Japanese release, with manufacturers more downbeat than they were in April but services less so to a modest degree. Indeed, the headline manufacturing PMI fell 1.3pts in May to 42.8, while the output component fell a steeper 4.6pts to 32.6, signalling ongoing significant contraction in the sector. Admittedly, with the government having relaxed its lockdown measures earlier this month, manufacturers were notably more upbeat about production prospects over the coming twelve months. This notwithstanding, new orders continued to decline at a rapid pace in May.

Turning to services, the reopening of the economy to some extent provided a boost to activity. But the headline PMI for the sector rose just 6pts in May to 25.5, still the second-lowest reading on record and consistent with significant troubles for the sector. But firms were also less pessimistic about the near-term outlook too, with the new orders index up almost 10pts on the month to 31.1. Nevertheless, with spare capacity having risen considerably and labour market slack to further weigh on wage growth, today’s survey suggested that disinflationary pressures were unsurprisingly more pronounced. 

Euro area:
While some European markets will be closed today for the Ascension Day holiday, we will still shortly see the release of the flash PMIs for May. Led by Germany, and tallying with yesterday’s consumer confidence indicator, the PMIs are expected to point to some modest improvement in conditions from the record lows recorded in April, when the headline euro area composite PMI fell more than 16pts to just 13.6. Nevertheless, all key indices across the euro area are likely to remain at very weak levels and point to a ongoing sharp contraction in activity across the board.

Like in other major economies, today brings the release of the UK preliminary PMIs for May. Following April’s record weakness when the composite PMI fell more than 22pts to just 13.8, the flash PMIs are likely to suggest a modest improvement in conditions in May as firms found ways to work around the lockdown measures, and the government encouraged workers in manufacturing and construction in England to resume activity from 11 May. Nonetheless, the headline measures are likely to remain well below the key-50 level, signaling a continued contraction in activity. This morning will also bring the CBI’s latest industrial trends survey for the same month.

In the US, we will also get the release of the preliminary PMIs for May, which, unsurprisingly, are expected to signal ongoing contraction in activity albeit at a less severe pace than in April. Similarly, the May Philly Fed indices of business activity and the Conference Board’s Leading Indicators are likely to remain at weak levels. In terms of hard data, yet more dire weekly jobless numbers can be expected as well as a further fall in the existing home sales data for April. Elsewhere, Fed Chair Powell will give opening remarks at a virtual ‘Fed Listens’ event this evening, while Vice-Chair Williams and Clarida will participate in online discussions on the US economy.

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