Japan’s manufacturing PMI cools in June

Chris Scicluna

Risk sentiment improves further as Powell plays down inflation risks
With Jay Powell professing to House representatives “a level of confidence” that inflation will decline next year – and ruling out as “very, very unlikely” a repeat of the 1970s inflation blowout – and also underscoring that the Fed remains a long way from rate hikes, investor sentiment has continued to recover over the past day. At the close, the S&P500 was up 0.5%, led by gains in consumer discretionary and technology stocks, and so not far below last week’s record close. In the bond markets, Powell’s reassurance that the current inflation spike owed mostly due to the reopening of the economy led to a modest rally, with the 10Y UST yield falling 3bps to 1.46%. The reduction in risk aversion also led to a further softening of the greenback.

US equity futures have edged a couple of tenths higher since the close, while the greenback has firmed modestly and UST yields are little changed. Against that background, it has generally been a positive day in Asian stock markets, with the Hang Seng and TAIEX posting especially strong gains of well over 1%, while stocks in mainland China and Singapore tracked the gains on Wall Street. Japan bucked the trend, with the TOPIX declining 0.5% today after rebounding more than 3% yesterday. Local news included a marked softening of Japan’s flash manufacturing PMI in June, with the output index falling below 50 for the first time since January (more on this below). Meanwhile, a month out from the opening ceremony, organisers confirmed that the Tokyo Olympics will be an alcohol-free event in order to discourage any mingling by the up to 10,000 spectators presently expected to be allowed into the venues.

In the Antipodes, the coronavirus cluster in Sydney has continued to grow, prompting officials to announce new restrictions on public gatherings and travel in parts of the city, as well as compulsory mask-wearing in indoor venues. So while the ABS reported preliminary data pointing to a record merchandise trade surplus in May, and despite a rally in technology stocks, the ASX200 declined 0.6%. The 10YAGCB yield fell 3bps to 1.55%, simply tracking the decline in UST yields. There was little reaction to a speech by RBA Assistant Governor Ellis, which reviewed the post-pandemic performance of the economy but had little to say about the policy outlook. Today the coronavirus outbreak in Sydney has also had repercussions in New Zealand, where the Wellington region has moved to a ‘level two’ alert until at least midnight Sunday – thus leading to some restrictions on public gatherings – following the weekend visit of a Sydney tourist since confirmed to have coronavirus. However, Kiwi stocks still posted modest gains and the Kiwi 10Y NZGB underperformed with the yield declining just 2bps to 1.78%.

Japan’s manufacturing PMI softens in June as supply bottlenecks and pandemic restrictions continue to bite; services PMI picks up modestly
As far as economic data are concerned, the focus in Japan today was on the release of the flash PMIs for June, which in contrast to the recent trend pointed to a softening of conditions in the manufacturing sector – albeit from historically firm levels – but a slight improvement of conditions facing the services sector. At the aggregate level, the composite PMI output index declined 1.0pt to a five-month low of 47.8. As a result, the average through Q2 stands at 49.2 – an improvement on the 48.4 reading in Q1, and consistent with the view that the pandemic-induced contraction in the economy during Q2 will be less than the 1%Q/Q contraction in Q1.

In the detail, the headline manufacturing PMI fell 1.5pts to a four-month low of 51.5. Of particular note was a 4.6pt slump in the output index to a seven-month low of 49.1. Supply bottlenecks are likely to be part of the explanation – the supplier deliveries index fell to the lowest level since May last year. The new orders index also fell a reasonably steep 1.9pts to a five-month low of 50.6, whereas the new exports index fell just 0.7pt to a still relatively firm 53.1. The employment index nudged up 0.1pts to a 17-month high of 51.1, perhaps suggesting that firms maintain a constructive outlook regarding longer-term prospects for demand. As far as inflation is concerned, with commodity prices off their highs, the input prices index declined 1.0pt, albeit to a still elevated 61.4, while the output prices index also fell 1.0pt to a six-month low of 50.5.

Turning to the services sector, after slumping 3pts last month, the headline services index – the business activity index – increased just 0.7pt to a still contractionary 47.2 in June, with activity continuing to be impacted by restricted trading conditions, especially in the hospitality sector and large. The new orders index increased just 0.1pts to 48.2. However, with firms looking forward to the removal of restrictions and activity associated with the Olympics, the business expectations index picked up 1.1pts to 56.5. The employment index was steady at 51.1. In contrast to the manufacturing sector, pricing pressures firmed in June. The input prices index increased 0.2pt to 53.1 while the output prices index increased 0.3pts to 51.0 – the latter back in line with April’s reading and over 2pts above the (weak) long-term average.

Flash PMIs the focus in both the euro area and the UK today
The flow of euro area economic sentiment surveys continues today with the release of the June flash PMIs, which are expected to point to an acceleration in the pace of economic expansion led by services, for which the euro area activity PMI is expected to rise 2.8ppts to 58.0, which would be the highest since January 2018. Meanwhile, the euro area manufacturing output PMI is expected to remain elevated but edge back down for a third successive month from 62.3 in May. The survey will also likely continue to report backlogs of work close to record highs and continued very strong input price pressures in the sector. Overall, the euro area composite PMI is expected to rise from 57.1 in May to 58.8, which would be the highest since January 2018, underscoring the likelihood of a firm return to positive GDP growth in Q2. Like in the euro area, ahead of tomorrow’s BoE announcements, the focus in the UK today will be on the preliminary June PMIs, which we expect to be consistent with firm growth this month, despite the UK government's decision to extend the remaining restrictions on activity for a further four weeks. In particular, the composite PMI is expected to remain close to its record high of 62.9, thanks to robust conditions in both manufacturing and services.

New home sales, current account data and flash PMIs ahead in the US, together with more Fedspeak
Following yesterday’s confirmation of a fourth consecutive decline in existing home sales in May – an outcome that Daiwa America’s Mike Moran attributes to tight inventory and the sharp rise in prices that has probably squeezed some buyers from the market – today will see the release of new home sales data for May. Mike expects new home sales will also post a small decline in May, although sales will remain well above pre-pandemic levels (unlike existing home sales, which have now largely returned to the pre-pandemic trend). Today’s other reports include current account data for Q1 (which Mike expects will point to a markedly wider deficit) and the flash PMIs for June (not a great focus for the market, but likely to remain close to the record high levels set in May). Meanwhile the Fedspeak will continue, with Governor Bowman amongst today’s speakers.

Australian merchandise trade surplus rises to another record high in May
Today the ABS released preliminary merchandise trade figures for May (as with the preliminary retail sales report, the ABS will discontinue publication after next month’s June reading). In unadjusted terms (no seasonally-adjusted data are released), total exports increased a strong 11%M/M from the Easter-impacted April reading, boosting annual growth to an impressive 34%Y/Y, with both rural and non-rural exports behaving similarly. Exports of metal ores increased a further 15%M/M – setting a record high for a third consecutive month – to be up a whopping 63%Y/Y, led by strong demand from China. This growth owed mostly to an 18%M/M surge in exports of iron ore – with both volumes and prices rising – and accounts for around three-quarters of the total growth in exports over the past year. By contrast, imports increased just 1%M/M and 17%Y/Yin May. Imports of capital goods increased 6%M/M and 20%Y/Y, but imports of consumption and intermediate goods declined during the month while remaining much higher than a year earlier. These preliminary figures indicate an unadjusted merchandise trade surplus of A$13.3bn in May – almost A$3.7bn larger than last month and around A$7.1bn larger than in the same month a year earlier. Allowing for seasonality and likely developments in services trade, this suggests that next month the full trade report will indicate Australia’s first-ever seasonally-adjusted monthly trade surplus exceeding A$10bn.

Aussie flash PMIs soften in June, but continued to indicate strong growth in activity and rising prices
In other Aussie news, the flash Markit PMIs – which, due to their short history, tend to play second fiddle to more established business surveys – continued to point to strong growth momentum in June, even if not quite as strong as during the preceding two months. The composite PMI output index declined 1.9pts to 56.1, thus remaining almost 4pts above the average since this indicator began in 2016. Both the manufacturing and services sector contributed equally to the slowdown, which might have owed in part to ongoing supply bottlenecks and the short lockdown in Melbourne.

In the detail, after hitting a record high last month, the headline manufacturing PMI fell 2.0pts to 58.4. The output index fell a similar 1.9pts to 56.1. However, the new orders index fell a notable 4.2pts from last month’s record high to 56.1, albeit leaving it still about 3pts above the historic average. The new export orders index also lost momentum, falling 3.1pts to a three-month low of 52.2. Supply constraints remained very much in evidence, with the delivery times index falling to the lowest level since the all-time low in April last year. In the service sector, the headline PMI – the business activity index – fell 2.0pts to a three-month low of 56.0. After hitting a record high in April, the new orders index fell 2.3pts for a second consecutive month, thus reaching a four-month low of 55.6 that nonetheless remains about 3pts above the historic average. However, the employment index fell just 0.9pts from last month’s record reading to 55.5.

On the pricing front, in the manufacturing sector the input price index eased 1.5pts to 74.7 and the output prices index eased 1.9pts to 60.9 – in both cases, still well above the long-term average. In the service sector, the input prices index fell 1.2pts to 59.7 but the output prices index edged up 0.2pts to a record 56.1. So, after hitting a record high last month, the composite output prices index eased just 0.1pt to 56.7 in June. Given the limited history of this index, it is unclear exactly what this high reading – around 5pts above the average – might imply for future inflation, but in any case the RBA has made clear that it will remain focused on actual inflation outcomes, rather than on indicators and forecasts.

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