Japan’s services PMI revised up; China’s Caixin PMI rebounds

Chris Scicluna
Emily Nicol

Wall Street hits a new closing high; Japanese equities weaker, but markets firmer today across most of the other Asian markets
While US auto sales fell to a 12-month low in July, news of a stronger than expected lift in factory orders in June and favourable corporate earnings reports propelled Wall Street higher yesterday. Indeed, at the close the S&P500 had advanced 0.8%, wiping out the losses over the previous two sessions and setting a new closing high. That news didn’t have much impact on the bond market however, with the 10Y note closing about unchanged at 1.17%. The greenback was also unmoved.

Against that background, while US equity futures are presently marginally weaker today, it has mostly been a positive day in Asia. One notable exception has been Japan, where the TOPIX fell 0.5% and the 10Y JGB yield has returned to 0.0% for the first time since December. While Japan’s services PMI was revised up to a final reading of 47.4 in July, it remained in contractionary territory. And with Tokyo reporting more than 3,700 new virus cases yesterday, the current state of emergency seems likely to extend beyond the close of the Olympics. Elsewhere, yesterday’s worries about Chinese regulators seemed to have eased today, with the Hang Seng presently up about 1% and the CSI300 up around 0.7%. A much larger than expected rebound in the Caixin services PMI in July further supported sentiment. In addition, South Korea’s KOSPI has ncreased more than 1%, with bond yields declining slightly after yesterday’s minutes from the BoK’s July meeting led investors to think that this month’s impending and widely expected rate hike might not be followed back-to-back by a further hike in October.

In the Antipodes, after the RBA surprised many yesterday, investors found no surprises in today’s Aussie data. Retail volumes increased 0.8%Q/Q in Q2 despite a lockdown-driven decline in spending in June that was in line with preliminary data. So the ASX200 moved a little higher today while Aussie bond yields were little changed, even with Sydney reporting a further 233 new virus cases (16 news cases were reported in Queensland). In New Zealand, another strong employment report saw the unemployment rate decline sharply to just 4.0% in Q2, while private sector wages grew the most in any quarter since 2008. So with the RBNZ now viewed as virtually certain to lift the OCR this month – indeed the market is now pricing a small chance of a 50bp hike – the 10Y NZGB bond yield increased 5bps to 1.71%. Even so, the good news for household incomes helped lift both the local stock market and the Kiwi dollar.

Japan’s services PMI revised up in July, still a little softer than June and well below 50
The only economic data in Japan today was the service sector and composite PMI reports for July. As has tended to be the case in recent months, the headline PMI services index – the business activity index – was revised up 1.0pts from the flash reading to 47.4, albeit leaving it down 0.6pts from June and still firmly in contractionary territory. The new orders index was revised up a similar 1.1pts to 48.5, leaving it just 0.2pts weaker than in June. Encouragingly, the business expectations index was revised up an especially sizeable 3.0pts to a final reading of 57.0, cutting its loss since June to a less worrying 1.3pts. Revisions to the employment and pricing indexes were minor.

In combination with the earlier upward revision to the manufacturing PMI output index, today’s improved showing from the service sector meant that the composite PMI output index was revised up a sizeable 1.1pts to 48.8 – now just 0.1pt below the June reading but 0.8pts below the average reading through Q2.

China’s Caixin services PMI rebounds strongly in July
Whereas the official PMI survey had pointed to little change in conditions in China’s service sector in July, today’s Caixin services PMI pointed to a substantial and unexpected uplift, albeit coming after a steep decline in June. The headline business services index rebounded 4.6pts to 54.9, leaving it just 0.2pts below the May reading. The new orders index rebounded a similar 4.1pts to 54.6 (now just 0.1pts below May) and the future activity index lifted 1.4pts to 62.7. The rebound carried through into the survey’s pricing indicators, with the input prices index rising 4.0pts to 54.8 and the output prices index rising 4.2pts to a seven-month high of 53.2. The recent volatility in the Caixin PMI may reflect the survey’s sample, which includes smaller firms than captured in the official PMI survey, and perhaps a greater exposure to the Guangdong province (which suffered a virus outbreak in June). Given the current virus outbreak in parts of China, we imagine that the PMI will do well to hold its current level next month.

Euro area retail sales data and final services PMIs both to signal firm growth despite spread of delta variant
After the upside surprise to the flash euro area Q2 GDP, today’s euro area retail sales figures will provide some additional insight into the strength of private consumption last quarter. While the Bank of France's measure of retail sales saw softer growth in June than in May, the strength in the German figures earlier this week should imply a robust outturn for aggregate retail sales in June, with a rise of 1.5%M/M or more, following growth of 4.6%M/M in May. German new car registration figures for July are also scheduled. But like the outturns from France, Italy and Spain earlier in the week, these are likely to show that auto sales remain well down on 2019 levels, not least restrained by ongoing supply bottlenecks in the sector.

This morning will also see the release of the final euro area services and composite PMIs for July. According to the preliminary release, and in contrast with the moderation reported in Monday’s manufacturing survey, the services sector activity index rose more than 2pts to 60.4, the best on the survey in 15 years. As such, the euro area composite output PMI rose 1.1pts to 60.6, the best since 2000, implying a strengthening of recovery momentum.

Ahead of tomorrow’s BoE MPC meeting, final service PMIs to reaffirm moderation in UK growth momentum in July
The final services and composite PMIs for July are also due from the UK, providing a further take on the state of the economy ahead of tomorrow’s BoE MPC meeting. The flash services PMI revealed that the activity index fell 4.6pts to 57.8 in July, suggesting that growth momentum in the sector might have passed its peak. The flash composite PMI also fell a sizeable 4.5pts to 57.7, a four-month low, with a notable slowing in growth of new orders.

ISM services report and ADP employment count the focus in the US today; corporate reporting continues
With the July non-farm payrolls report looming, today investors will try to infer the likely outcome from the ISM services survey and ADP employment report. Regarding the former, Daiwa America’s Mike Moran expects the headline index to remain close to the 60.0 reading seen in June, perhaps helped by a rebound in the employment index from last month’s surprisingly soft outcome. While the ADP measure of private payrolls has diverged significantly from the official measure at times during the pandemic, an ADP reading consistent with his forecast of a 750k increase in total non-farm payrolls would be mildly reassuring. Aside from data, corporate earnings will also be in focus with close to 40 major companies reporting today. While most should continue to make good reading, for obvious reasons Royal Caribbean Cruises is likely to report further heavy losses. Today’s Fed speaking diary features contributions from Vice-Chair Clarida and St Louis Fed President Bullard.

No surprises in Aussie retail sales and services PMI readings, with flash outcomes confirmed
While the RBA yesterday provided local investors with a notable surprise, there was no surprises in today’s Australian economic reports. Indeed, in headline terms both reports printed exactly in line with indications from their respective flash releases.

Retail spending declined 1.8%M/M in June, led by a 4.0%M/M decline in the state of Victoria and a 2.0%M/M decline in the state of New South Wales – both subject to lockdowns for part of the month. Food retailing was the only category to see a lift in spending in June. Meanwhile, spending on clothing and accessories plunged 9.8%M/M, while department stores and at cafes/restaurants registered large declines of 7.0%M/M and 6.8%M/M respectively. Even given the decline in spending in June, retail volumes increased 0.8%Q/Q in Q2, rebounding from a 0.5%Q/Q decline in Q1. And given based effects associated with last year’s first-wave lockdown, the volume of spending was up flattering 9.2%Y/Y.

In other news, the services PMI was confirmed to have slumped 12.6pts to a 14-month low of 44.2 in July, largely reflecting the Sydney lockdown. In the detail, the new orders index was even weaker than in the flash report, with a 1.6pt downward revision to 42.5 leaving it 13.0pts weaker than in June. The indexes measuring outstanding business and employment were revised up modestly, but still declined markedly from June. No doubt reflecting disruptions to supply chains, the input prices index was revised up 0.7pts to 60.6, leaving it not far below the record high seen in May. Given today’s outcome and the earlier modest revision to the manufacturing PMI, the composite PMI output index was confirmed at 45.2 – down 11.5pts from June and the lowest reading since May last year.

Strong Kiwi labour market data seals expectations for a rate hike this month
Today’s release of labour market data for Q2 removed any doubt that Kiwi monetary policy settings are far too loose – as also plainly evident in the housing market – and barring unforeseen developments has sealed a rate hike from the RBNZ when the MPC next meets on 18 August. Household employment grew a stronger than expected 1.0%Q/Q – 0.4ppt above the already robust consensus expectation – lifting annual growth to 1.7%Y/Y. As a result, even with the labour force participation rate nudging higher, the unemployment rate fell a greater than expected 0.6ppt to 4.0% in Q2 – the lowest reading since Q4 2009. This outcome was 0.4ppt below the consensus expectation and 0.7ppt below the forecast that the RBNZ had made when it last published forecasts back in May. The number of hours worked increased an even larger 1.6%Q/Q in Q2, and given last year’s lockdown was up 13.0%Y/Y.

Importantly, the tightening of the labour market has led to a marked lift in wage growth. With additional impetus given by a further increase in the statutory minimum wage, the Labour Cost Index reported that private costs increased 0.9%Q/Q in Q2 – the largest quarterly increase since 2008 – lifting annual growth by 0.6ppt to 2.2%Y/Y. This outcome was also firmer than both consensus and RBNZ expectations. As this is a fixed weight index, with costs measured after subtracting increases tied to estimated gains in productivity, this indicates that growth in private unit labour costs is now above the 2%Y/Y midpoint of the RBNZ’s CPI inflation target range. Wage growth remains more restrained in the public sector, increasing 0.3%Q/Q and a steady 1.9%Y/Y. However, given the tightening of the labour market, increased pressure is likely to become evident in the public sector before long, with industrial action already planned in the health sector. 

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