Services PMIs point to different states of recovery

Emily Nicol
Chris Scicluna

Japan’s service sector remained weak in August
The final results of the Jibun service sector PMI survey for August confirmed the 0.4pt decline in the headline business activity index indicated in the flash release. As a result, the index remained at just 45.0 – the same weak level as had been recorded in June but still well above the shocking lows seen during prior months (the trough came amidst the national state of emergency in April at just 21.5). In the detail, some comfort might be taken from upward revisions to the future activity and new business indices, to 49.7 and 45.1 respectively, although both remained notably below their July readings and consistent with a lack of growth momentum ahead. The new export orders index was also revised a fraction higher to 41.7, but this remains well below pre-pandemic levels and likely not helped by the continued absence of foreign visitors to Japan’s shores. The output prices index was unrevised at 48.2, thus leaving it down 0.2pt over the month and consistent with falling prices amid weak demand. And the employment index suggested that firms in the sector continued to cut jobs for a sixth successive month.

With the manufacturing PMI having been revised higher earlier this week, the composite PMI was revised up 0.3pt to a final reading of 45.2, representing a mere 0.3pt improvement over the July reading albeit still the best outcome since February. Policymakers will surely hope for further improvement over coming months, reducing the need for ever-greater macro-policy stimulus. A third supplementary budget still seems bound to come along relatively shortly after Abe’s successor – presumably Yoshihide Suga – takes over. But the further BoJ rate cut and reduction in the 10Y JGB yield target, advocated again today by Policy Board über-dove Goushi Kataoka, seems bound to be continuously rejected by the other policymakers at the central bank.

China’s service sector continues to expand
In common with Monday’s official non-manufacturing PMI report (in which the headline index rose 1pt to 55.2), the Caixin service sector PMI – focused more on the SME sector – cast China’s service sector in an improving light in August. That said, it hardly suggested a stellar performance last month. The headline business activity index nudged down 0.1pt to a slightly less expansionary 54.0. And in the detail, the future activity index fell 3.3pts to 58.7 this month – still firmer than recorded over most of the last two years or so – while the new orders index fell 2.4pts to a four-month low of 52.9. However, the employment index rose 1.4pts to 50.8 – perhaps encouragingly the highest reading this year – and the new export orders index increased 2.5pts to 49.1. Given the improvement seen in the manufacturing survey (admittedly contrasting with the official PMIs for the sector which appeared more significantly impaired by the summer floods), the composite Caixin PMI increased 0.6pt to 55.1 in August, thus unwinding about half of the decline seen last month and leaving the index notably higher than typically seen over the past decade.

Australia’s services sector off the boil as Victoria lockdown took its toll
The final results of the service sector PMI survey for August cast Australia’s service sector in a slightly firmer light than had been indicated by the flash outcome, but still substantially weaker than had been indicated a month earlier. The headline business activity index was revised up 0.9pt to 49.0, but this was still down a hefty 9.2pts from the July reading as the new lockdown measures in Victoria took their toll. In the detail the new business index was revised up to 47.0, leaving it down a whopping 9.7pts during the month, but the employment index was revised down 0.7pts to a 3-month low of 47.5 suggesting net job cuts. While the manufacturing PMI was revised a little lower earlier this week, the upwards revision from the services sector was sufficient to lift the composite PMI by 0.6pt to a final reading of 49.4 – down 8.4pts from the previous month but not dissimilar to the levels prevailing around the turn of this year when the bushfires raged.

Australian trade surplus shrinks as exports wilt and imports rebound
Consistent with last week’s preliminary figures for goods, the full trade report for August showed that Australia’s surplus narrowed to A$4.6bn last month from A$8.1bn in July – an outcome that was slightly below market expectations and more in line with pre-pandemic levels. The value of exports of goods and services fell 4.4%M/M to be down 20.3%Y/Y at their lowest level since April 2018, with a sharp increase in exports of non-monetary gold more than offset by weaker exports of a wide array of other goods, including metals, ores and coal, rural commodities, and services. Indeed, not surprisingly, reflecting the closure of Australia’s border to foreign tourists, tourism-related exports were down a striking 50%Y/Y. Meanwhile, imports of goods and services rebounded 7.0%M/M in August, led in particular by increased shipments of consumer and capital goods. But with imports of services still down a whopping 56.7%Y/Y – and tourism-related imports down 99%Y/Y due to the near cessation of outbound travel – overall imports remained down 15.6%Y/Y.

Spanish services hit by revival in pandemic
The first of today’s euro area services PMIs came from Spain, and – perhaps unsurprisingly – suggested that the revival in the pandemic over the past month represented a blow to recovery in the sector. In particular, the headline services PMI fell a marked 4.2pts from July to 47.7, suggesting a drop in activity last month after two months of expansion, and a level well below pre-Covid norms. Within the detail, the indices for new business (down 3.0pts to 46.3) and business expectations (down 4.1pts to 51.4) also fell back significantly, suggesting risks of a lasting negative impact from the reimposition of restrictions on activity. Inevitably, Markit reported that the all-important tourist sector was particularly hard-hit by the fresh outbreaks of Covid-19.

Later this morning, the final August services and composite PMIs for the euro area as a whole are expected to point to a softer pace of recovery in the middle of the third quarter. Indeed, as the flash services PMI fell 4.6pts to just 50.1, despite the very modest uptick in the manufacturing output PMI, the flash euro area composite PMI fell 3.3pts to 51.6 in August.

Look ahead to today’s other European and US data
This morning will also bring the release of euro area retail sales figures for July. While sales in France and Spain maintained an upwards trend at the start of Q3, the unexpected fall in yesterday’s German retail figures suggests that there are some downside risks to the forecast increase of 1.0%M/M. Nevertheless, retail sales will still remain higher than a year earlier. In addition, new car registrations numbers from Germany for August may give further insight into the potency of the temporary VAT cut in stimulating demand against the backdrop of the recent rise in new Covid-19 cases.

Like in the euro area, the final UK services sector and composite PMIs for August will be published today. Despite the reimposition of certain local lockdowns, with the pandemic relatively well contained in the UK and government support programmes providing extra targeted support to demand, the flash PMIs implied continued improvement in business conditions in August. In particular, the headline services activity index rose 3.6pts to 60.1, the highest for six years. And, coupled with an uptick in the manufacturing activity index, the composite index rose to 60.3 in August, from 57.0 previously.

Finally, in the US, a number of top-tier releases will include the non-manufacturing ISM and final services PMI for August, and July’s final trade data. Moreover, after yesterday’s big downside surprise in the ADP employment index (428k), and ahead of tomorrow’s August payrolls report, this afternoon will bring Challenger job cuts figures and, in particular, weekly initial jobless claims numbers.

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