UK GDP falls short of expectations in May

Chris Scicluna
Emily Nicol

Coronavirus worries continue to drive equity markets lower across most of Asia
With increasing concern that the delta variant (or indeed other variants) of the coronavirus will delay the forecast strengthening of economies over the second half of this year – a concern flagged yesterday by the San Francisco Fed’s Mary Daly – risk aversion dominated yesterday’s trading. With European equity markets sharply lower, the 10Y UST yield fell below 1.25% ahead of Wall Street’s open. And US stocks opened firmly on the back foot, with the S&P500 down as much as 1½% in early trade. However, that proved to be the low point for the session, with the index paring its losses somewhat to close down 0.9%. Financials, industrials and materials led the market lower – the latter as growth concerns triggered a renewed decline in industrial metals prices. Just as equities finished off their lows, the 10Y UST yield rebounded to finish at 1.29% – down just 2bps on the day – and has since traded up to 1.33% during trading during Asia’s afternoon session. That move occurred even as US equity futures have remained little changed, with Reuters reporting that the Biden administration is set to add at least a further 10 Chinese entities to its economic blacklist due to alleged human rights abuses in Xinjiang.  

Yesterday’s losses on Wall Street and more worrying pandemic headlines provided the catalyst for further significant weakness at the open in most Asia-Pacific equity markets today, with the exception of Hong Kong where yesterday’s 2.9% decline had capped off an eight-day losing streak. In Japan, which yesterday confirmed a new state of emergency declaration in Tokyo and an Olympics that will largely play out without spectators, the TOPIX initially slumped more than 2% before paring its losses in afternoon trade to close down 0.4%. Meanwhile, with new coronavirus cases in South Korea setting a fresh record high, the KOSPI is down a little more than 1.0% as we write. Given the uptrend in cases, South Korea’s government has announced that Seoul’s pandemic alert status will rise to the highest level for a two-week period beginning on Monday, thus banning private gatherings of three of more people after 6pm. In a similar vein, Australia’s ASX200 has declined 0.9% with NSW government officials reporting a further 44 coronavirus cases in Sydney – the highest number so far, with two-thirds of those cases infectious while out in the community. As a result, social distancing rules have been tightened further, with public gatherings limited to two people and funerals to be limited to 10 people from Sunday. Even so, the 10Y AGCB has followed UST yields, rising 4bps to 1.35%.  

Performing better than most bar Hong Kong, where the Hang Seng is currently up 0.8%, in Mainland China the CSI300 is down a relatively modest 0.3% after the June CPI printed slightly below expectations – an outcome that suggests no obvious inflation obstacle to the PBoC providing a little more liquidity, targeted at SMEs, in line with the State Council’s wishes.

Japan’s broad money growth continues to slow in June
A quiet end to the week for economic data in Japan saw the BoJ release the monetary aggregates for June. M3 expanded at an annualised pace of just 3.5% during the month, compared with more than 24% in June last year – the latter reflecting the BoJ’s accelerated asset purchases in response to the financial stress seen at the onset of the pandemic. As a result, annual growth in M3 slowed to a 13-month low of 5.2%Y/Y from 6.8%Y/Y previously, which was in line with market expectations. Similarly, M2 grew at an annualised pace of just 2.3% in June, and so annual growth slowed 2.0ppts to 5.9%Y/Y.

Chinese inflation slows in June, with little sign of higher PPI input prices impacting the CPI
The focus in China today was on the PPI and CPI reports for June. Beginning with producer prices, the overall PPI output index increased just 0.3%M/M, down from 1.6%M/M in May and the smallest increase since October last year. So with prices having increased by slightly more in the same month last year, annual inflation nudged down by 0.2ppt to 8.8%Y/Y – an outcome that was in line with the consensus expectation. While prices in the mining sector climbed a further 3.9%M/M, the price of manufactured producer goods increased just 0.3%M/M (leaving annual inflation steady at 7.4%Y/Y). Meanwhile, there was again little evidence of rising input prices affecting output prices for consumer. Indeed, the PPI for consumer goods fell 0.2%M/M, led by lower prices for food, apparel and other non-durable goods, and so was up a very muted 0.3%Y/Y. Prices for durable consumer goods increased just 0.1%M/M in June and were down 0.6%Y/Y.

The subdued inflation in consumer goods prices at the PPI level was also evident in the CPI, which in headline terms fell 0.4%M/M in June. And so while prices had also declined in June last year, annual CPI inflation moderated by 0.2ppts to 1.1%Y/Y – a tenth below the consensus expectation. The key driver of the decline was food prices, which fell a further 2.2%M/M to be down 1.7%Y/Y. After declining by 11%M/M over each of the previous two months, pork prices fell a further 13.6%M/M in June while fresh vegetable prices fell 2.3%M/M. By contrast, non-food prices were stable during the month so annual non-food inflation nudged up 0.1ppts to a 26-month high of 1.7%Y/Y. However, this partly reflects higher energy prices, with automotive fuel prices increasing by a further 2.0%M/M in June and so up more than 21%Y/Y. The core CPI, which excludes both food and energy, declined 0.1%M/M – the first negative reading since October – leaving annual inflation stuck at just 0.9%Y/Y. Clearly, both headline and core inflation remain very subdued relative to the PBoC’s target of 3% inflation, thus posing no obstacle to the PBoC following the State Council’s wishes and providing more liquidity to support businesses, provided it can satisfy itself that it will not exacerbate financial imbalances in the process. We expect an imminent cut in the RRR, perhaps as soon as today or over the coming weekend.  

UK GDP growth softer than expected in May, with all main sectors sub-consensus
A busy end to the week for UK top-tier releases brought monthly GDP figures for May. And while these reported the fourth consecutive monthly expansion, growth of 0.8%M/M fell some way short of expectations (the BBG median was almost twice as strong at 1.5%M/M) and followed downwardly revised growth in April (2.0%M/M) to leave the level of output still 3.1% below the February 2020 level. Nevertheless, not least given the weakness at the start of the year and strength in March (upwardly revised to 2.4%M/M), today’s release showed that GDP in April and May was trending more than 4% higher than the average during Q1.

Within the detail, the services sector predictably benefitted from the further easing of restrictions – particularly those affecting hospitality and entertainments – with activity up 0.9%M/M. Indeed, consumer-facing services were up more than 3%M/M in May, of which food and beverage services grew by 34%M/M, to leave the level of such activity a little higher than the August 2020 peak when the Eat Out to Help Out initiative gave a temporary boost, but still almost 9½% below the pre-pandemic level. So, despite the recent recovery, overall services output was still a little more than 3% below the pre-pandemic peak.

Industrial production also grew by 0.8%M/M in May, boosted by the strongest monthly increase in energy output (5.7%M/M) for more than nine years as adverse weather conditions that month increased demand. But contrasting with expectations, manufacturing production fell slightly for the second successive month, with almost half of the subsectors contributing to the decline and export sales down for the first time since January. Like in Germany and France, manufacturing weakness was dominated by the transport sector, of which output was down 16.5%M/M as microchip shortages disrupted car production – indeed, autos production fell for the third consecutive month and by a whopping 27%M/M, to leave it 35% below the pre-pandemic level. In marked contrast, production of pharmaceuticals surged 25%M/M (following a decline of 14½%M/M in April) to leave it more than 14% higher than the February 2020 level. And overall, given the monthly profile, manufacturing output was still trending in Q2 almost 1½% higher than the Q1 average.

Construction sector output, meanwhile, slipped back for the second successive month in May (down 0.8%M/M), with declines in both repair and maintenance and new work in May. But the recent weakness follows strong growth in March and April (up a cumulative 8½%) particularly in private new housing and infrastructure work. So, despite falling in both April and May, the average level of output in April and May was more than 3% higher than Q1.

ECB to release the account of its June monetary policy meeting with Italian IP data out too
Following yesterday’s long-awaited announcement of the conclusions of the ECB’s strategy review – which were something of a damp squib and offered no surprises – today will bring publication of the account of the ECB's June monetary policy meeting, which was originally scheduled for yesterday but was postponed due to the strategy review. At the June meeting, the ECB published updated macroeconomic projections, which strongly 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. A quiet end to the week for euro area data releases brings Italian industrial production figures for May, which are expected to post modest growth of 0.3%M/M, which would push the level up to 1.4% above the February 2020 level.

Another quiet day for data in the US
This week’s US economic diary concludes with the final wholesale trade report for May, bringing news on both sales and inventories (the latter increased 1.1%M/M in the advance report released last month).

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