Services PMIs to signal ongoing uptrend

Chris Scicluna

Markets mixed in Asia even after Wall Street sets fresh high after mixed employment report
Friday’s US employment report proved a mixed bag, with an encouraging 850k lift in non-farm payrolls tempered by an 18k decline in the household-based measure of employment. Together with a 150k lift in the labour force, the soft household measure of employment resulted in an unexpected 0.1ppt lift in the U-3 unemployment rate to 5.9%, rather than the decline that analysts had expected. So with investors concluding that the report would encourage the Fed to be patient in withdrawing stimulus, the S&P500 rallied 0.75% to post a fresh record high for a seventh consecutive session. Meanwhile, the 10Y UST yield declined 3bps to 1.42% and the greenback lost ground against all major counterparts.

Despite the favourable background provided by Wall Street, it has been a mixed started to the week in the Asia-Pacific region. A key focus during the session has been Sunday’s news that China’s cybersecurity regulator had ordered Didi Chuxing to remove its popular ride-hailing app from online stores – this coming following Friday’s announcement of a review, which saw Didi Global stock decline 7% just days after its huge US IPO. According to a statement, the regulator is concerned about the potential leakage of data relating to an estimated 550mn Chinese users (who at least for now will be allowed to continue to use the app while the review is undertaken). The regulator has also announced two additional reviews of US-listed firms today, providing a reminder of regulatory risks faced by US investors in Chinese companies. This news has seen US equity futures move a touch weaker today, while shares in mainland China are down about 0.4% and those in Hong Kong are down a little over ½%.

In Japan, the TOPIX has declined 0.4% despite an upward revision to the services PMI in June, with losses led by a near-5% decline in Softbank stock – a key investor in Didi Chuxing. Investors were perhaps also a little disappointed with the LDP’s showing in Sunday’s Tokyo metropolitan elections. Preliminary results indicate that PM Suga’s LDP won 33 seats in the 127-seat assembly, up from 25 seats at the 2017 election. However, the LDP’s haul was only two more than the Tokyoites First – which won 31 seats, albeit 14 less than in 2017 – and less than pre-election polls had indicated. So together with the coalition partner Komeito’s unchanged holding of 23 seats, this leaves the coalition short of a majority. Meanwhile, the LDP’s main opposition at the national level, the Constitutional Democrat Party, picked up seven seats to lift its total to 15. In other news, speaking ahead of the release of the Bank’s quarterly Regional Economic Report, BoJ Governor Kuroda reiterated the Bank’s view that the economy is picking up as a trend. Meanwhile, weekend reports confirmed that the government will meet with Olympics organisers later this week to consider whether to bar spectators, at least from the larger venues.

In the Antipodes, ahead of tomorrow’s RBA Board decision – at which the Bank is widely expected to announce a more flexible QE programme after the current purchase cap is met in September – the latest flow of Australian data further highlighted considerable momentum in the economy. The stock market was led higher by transportation stocks, with Sydney Airport rallying over 30% after announcing that it had received a A$22.3bn takeover offer. But with officials announcing 35 new virus cases in Sydney – a disappointment after just 16 cases on Sunday – the ASX200 advanced just 0.2% today. Meanwhile, with UST yields declining, the 10Y AGCB declined 4bps to 1.43%.

Japan’s June services PMI revised up; BoJ report points to underlying uptrend in activity in most regions, but potential growth estimated at just 0.1%Y/Y
After slumping 3pts in May, Japan’s headline PMI services index – the business activity index – increased 1.5pts to a still contractionary 48.0 in June – 0.8pt firmer than indicated by the preliminary release. The new orders index was revised up 0.6pt to 48.7 and with firms looking forward to the removal of restrictions and activity associated with the Olympics, the business expectations index was revised up a sizeable 1.8pts to 58.3 – up 3.0pts from May and the highest reading in three months. The input prices index was revised down 0.7pt to 52.5 while the output prices index was revised down 0.2pt to 50.8. Given the earlier upward revision to the manufacturing PMI output index, the composite PMI output index was revised up a sizeable 1.1pts to 48.9 – now 0.1pt firmer than the May reading. As a result, the index averaged 49.6 through Q2 – an improvement on the 48.4 reading in Q1, and suggesting that the likely contraction in the economy will be smaller than the 1%Q/Q contraction that occurred in Q1.

In other Japanese news, the BoJ released the latest edition of its quarterly Regional Economic Report (Sakura Report), which provides a summary of anecdotal information gathered by the Bank’s various branches in a similar manner to the Fed’s Beige Book. The news this quarter was somewhat mixed compared with three months earlier, with two of the nine regions (Chugoku and Shikoku) revising down their economic assessment, two revising up their assessment (Hokuriku and Kinki) and the remaining five regions leaving their assessment unchanged. That said, all regions aside from Hokkaido – where the economy was viewed as being more or less flat – continued to report improving conditions as a trend, albeit with pockets of weakness due to the pandemic. Encouragingly, signs of a lift in business investment were cited by six of the nine regions (up from five previously). However, unsurprisingly, the assessment of consumer spending was less positive with most regions that had previously seen an uptrend now citing a pause or slowing of growth. As was the case previously, comments on production were positive with all regions reporting at least some degree of pickup, with only one region pointing to a slowdown in that growth. However, uniformly, all regions continued to describe both labour market conditions and household incomes as being weak.

Completing the day’s Japanese releases, the BoJ also released its updated measures of potential growth and the output gap. According to the Bank’s estimate, despite the economy having contracted during the quarter, the negative output gap declined to 1.37% of GDP in Q1 from 1.94% in Q4, with both the labour and capital input gaps at their lowest level since the pandemic began. Meanwhile, the BoJ estimates that the economy’s potential growth rate has shrunk to just 0.1%Y/Y, with growth in total factor productivity offset by the ongoing downtrend in hours work, leaving just very small positive contributions to growth from increases in the number of employees and the size of the capital stock.

Consumer spending, wages and sentiment data still to come in Japan this week
Looking ahead to the remainder of this weak in Japan, with one eye on next week’s BoJ Board meeting and updated Outlook Report, the economic focus will be on the latest indicators of consumer spending, incomes and sentiment.  

Tomorrow will bring the release of the MHLW’s Monthly Labour Survey and MIC’s survey of household spending and incomes, both for May. While these reports will likely point to a lift in annual wage growth and strong annual growth in spending, both measures will be flattered by base effects associated with last year’s severe contraction in activity at the onset of the pandemic. A day later the BoJ will release its Consumption Activity Index for May, which is a much more complete measure of consumer spending than the MIC’s indicator and more representative of how the national accounts are likely to evolve. Sadly, with restrictions on activity in place throughout the month, spending is likely to have contracted further following a 0.8%M/M decline in April. The Cabinet Office’s leading and coincident indicators are also likely to soften on Wednesday. On Thursday, the main focus will be the Economy Watchers Survey for June. As in May, perceptions of current conditions are likely to remain relatively weak, albeit improving a little with full state of emergency conditions being removed in most prefectures. Perceptions about the outlook are likely to be much less downbeat, as respondents look forward with hope to a further reopening of the economy and perhaps some economic benefit from the Olympics. The BoJ’s bank lending data for June and quarterly Opinion Survey are also released on Thursday, followed by the monetary aggregates for June on Friday.  

Caixin services PMI slumps to 14-month low in June; inflation reports the focus in China over the remainder of this week
Following last week’s larger-than-expected decline in the official non-manufacturing PMI, today China’s Caixin services PMI fell an even greater 4.8pts to a 14-month low of 50.3 – far lower than market expectations. The new orders index slumped a similar 4.1pts to a 14-month low of 50.5, while the future activity index fell 2pts to a nine-month low of 61.3. Meanwhile, the output prices index slumped 3.9pts to a 13-month low of 49.0. Given this result – likely impacted by a rise in local coronavirus cases – and a slightly softening in the manufacturing sector, the composite PMI output index fell 3.2pts to a 16-month low of 50.6. Even so, the index averaged 53.0 in Q2, which compares favourably with the 52.7 average in Q1 (China’s Q2 GDP report will be released next week).

Looking ahead, the only economic reports due over the remainder of the week are Friday’s PPI and CPI reports for June. Last week’s PMI surveys suggest that PPI inflation will moderate from last month’s near 13-year high of 9.0%Y/Y, but CPI inflation is likely to remain close to the soft 1.3%Y/Y seen in May.  

Services PMI data the focus in the euro area today; May IP reports amd ECB meeting account to come later in the week
The week in the euro area will kick off shortly with the final services PMIs for June and Sentix investor sentiment indices for July. Both surveys will be highly upbeat. According to the flash estimates, the euro area services activity PMI rose 2.8pts to a 41-month high of 58.0, which took the composite PMI up 2.1pts to a fifteen-year high of 59.2. And if the national surveys are anything to go by, the Italian and Spanish PMIs, to be published for the first time, should be exceptionally strong too. Tomorrow will bring euro area retail sales figures for May – which, thanks to strong growth in Germany and France, are likely to more than reverse the drop of 3.1%M/M in April – along with German factory orders data for the same month. German industrial production figures for May follow on Wednesday with the drop of 1.0%M/M the prior month unlikely to be fully reversed not least due to ongoing constraints in the auto sector. The equivalent German goods trade data are due Thursday, with French and Italian IP numbers for the same month will come on Friday. Beyond the economic data, the account of the ECB’s June monetary policy meeting will be published on Thursday. At that meeting, the ECB published updated macroeconomic projections, which suggested that current price pressures would be transitory, and thus committed to maintain net PEPP purchases over the coming three months at a significantly higher pace than at the start of the year. That policy decision was not unanimous, however, and the account will therefore reflect the range of views among Governing Council members.

Final services PMI data ahead in the UK today; thereafter, Friday’s May GDP data the focus
The week’s most notable UK economic data will come at the end of the week with the estimates of May’s GDP, production and trade data, which are all due on Friday. After non-essential stores were able to reopen in April, further easing of restrictions – particularly those affecting hospitality and entertainments – occurred in May. So, although retail sales fell back 1.4%M/M, services output is again set to lead overall economic growth in May, having risen a strong 3.4%M/M in April. Manufacturing production (-0.3%M/M) and mining and quarrying (-15.0%M/M due to planned maintenance at oil fields) should rebound too. And so, having grown in excess of 2.0%M/M in March and April, we expect GDP growth of 1.3%M/M in May to leave the level of output about 2.5% below the February 2020 level. Ahead of the GDP figures, today will bring the final services PMIs for June while the equivalent construction sector survey results are due tomorrow. According to the flash estimate, the services activity PMI fell 1.2pt in June to a still-elevated 61.7 to leave the composite PMI similarly down 1.2pts at 61.7. Among other data to come, June’s new car registrations are also due today, while Q1 unit labour cost figures are due Wednesday. And Thursday will bring the RICS housing survey for June – which is likely to point to ongoing house price growth ahead – along with the BoE’s latest quarterly credit conditions survey.

US markets closed today; ISM services index, JOLTS job vacancies, FOMC minutes and Fedspeak highlight a quiet week for data;
US financial markets are closed today in observance of the Independence Day holiday. Looking ahead to the remainder of the week there are only a small number of diary entries that are likely to gain investor attention. The ISM services for June is released tomorrow, with Daiwa America’s Mike Moran expecting the headline index to remain close to last month’s record reading of 64. On Wednesday, the JOLTS survey for May will likely continue to point to job vacancies remaining near the record high reached in April, while the minutes from last month’s FOMC meeting will be read especially closely for further clues regarding the Fed’s QE tapering inclinations. Thursday will bring just consumer credit data for May and the weekly jobless claims report, while Friday features just news on final wholesale sales and inventory data for May. At this stage, the Atlanta Fed’s Bostic is the only scheduled Fed speaker over the coming week.

Aussie economic data continues to point to considerable economic momentum 
A busy start to the week in Australia contained a number of key reports that will feed into the RBA Board meeting that is currently underway (and that concludes tomorrow). Encouragingly, these reports continued to point to an economy with considerable growth momentum.

First up, the final retail sales report for May pointed to a 0.4%M/M lift in spending – somewhat firmer than the 0.1%M/M increase indicated in the preliminary report. Coming off last May’s initial post-lockdown rebound, spending grew a solid 7.7%Y/Y. And with spending having increased by more than 1%M/M in both March and April this year, spending in Q2 is currently tracking 1.9% above the average level through Q1. Growth in May was driven by a 1.1% lift in spending on food retailing, while both café and restaurants and ‘other’ retailing grew 0.7%M/M. Spending on household goods fell 1.1%M/M and was down 5.5%Y/Y from the highly-elevated level reached a year earlier as consumers kitted out their home offices. By state, spending grew 1.6%M/M in Queensland following a lockdown in April while a late-month lockdown led to a 0.9%M/M decline in spending in Victoria.

Turning to the building sector, the number of dwelling consents fell 7.1%M/M in May and yet were still up a whopping 52.7%Y/Y. Approvals for private houses declined 10.3%M/M from last month’s record high but were still up 55.2%Y/Y, whereas approvals for multi-unit dwellings increased 1.2%M/M and 53.6%Y/Y. In value terms, approvals for non-residential buildings jumped almost 29%M/M and so were up 36.4%Y/Y. As a result, the value of approvals for all classes of buildings increased a very encouraging 47.7%Y/Y.

In other news, the headline services PMI was revised up 0.8pts to a final reading of 56.8 in June, albeit leaving it down 1.2pts from May. The new orders index was little changed and so at 55.5 was still down 2.4pts from May, but still around 3pts above the historic average. Meanwhile the output prices index was revised up 0.4pt to a fresh record high of 56.5. Given today’s revision and earlier data from the manufacturing sector, the composite output index was revised up 0.6pt to 56.7, with the resulting Q2 average of 57.9 almost 3pts higher than the prior quarter and the highest for any quarter since the survey began in 2016.

Importantly for the RBA, the obvious momentum seen in economic activity is translating across to the labour market. The ANZ’s count of job advertisements increased a further 3.0%M/M in June – the 13th consecutive increase. The number of advertisements was more than double last year’s depressed level, but more meaningfully the highest number since October 2008. This bodes well for labour market data to remain a source of consistent upside surprise compared to the RBA’s forecasts.

Finally, the Melbourne Institute’s monthly inflation gauge increased a solid 0.4%M/M in June, albeit still lowering annual inflation to 3.0%Y/Y from 3.3%Y/Y previously. By contrast the trimmed mean increased just 0.1%M/M, leaving annual inflation steady at just 1.8%Y/Y. 

RBA likely to retain April-24 bond target and move to flexible QE; may drop reference to rate hike being unlikely before 2024 at the earliest
Without a doubt, the key event this week is the conclusion of the RBA’s Board meeting (indeed, aside of the RBA’s meeting, there are no further diary entries of any note this week). While the RBA will certainly retain its overnight cash rate target at 0.1%, there is greater uncertainty about how the RBA will approach at least one of the other two decisions it will make at this meeting. Least likely to surprise is the decision regarding the 0.1% target for the 3Y bond. In light of continued upside surprises in the economic data – and especially the labour market – a Reuters poll points to a unanimous expectation amongst analysts that the Board will elect not to role the target to the November 2024 bond from the currently-targeted April 2024 bond. Investors clearly share this view as the former bond is presently trading at a yield of 0.37%. Greater surprise is possible with the Board’s decision about what to do with its QE programme once the current A$200bn purchase cap is reached in September. The Board has already made clear that purchases will continue in some form. The aforementioned Reuters survey indicates that most analysts expect the Board to take a more flexible approach than the fixed cap/fixed weekly purchase plan adopted previously, with the Board perhaps even deciding to review purchases on a monthly basis.

Aside from these decisions, the other point of interest will be whether the Board retains its forecast that a lift in the overnight cash rate is unlikely “before 2024 at the earliest”, especially with the majority of analysts now forecasting a rate hike in 2023. It would not be surprising to see this language modified, although the Bank may elect to do so next month when it will also present updated economic forecasts in its quarterly Statement on Monetary Policy. Helpfully, reflecting the number of important decisions to be made at this meeting, just ninety minutes after the post-meeting statement Governor Lowe will make remarks providing additional explanation of the decisions reached. Lowe will also address a virtual meeting of the Economic Society of Australia on Thursday.

A quiet week ahead in New Zealand
There were no economic reports released in New Zealand today and the remainder of this week is similarly quiet with tomorrow’s installment of the NZIER’s long-running quarterly survey of businesses the only diary entry of note and the last important release ahead of the RBNZ’s 14 July policy review. The headline indicators of sentiment and activity are bound to have improved in line with developments in the ANZ’s monthly business survey, so most interest will centre on the survey’s unique measures of skill shortages and capacity utilization, as well as on pricing intentions. 

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