Japan's manufacturing PMI revised up

Emily Nicol

Equity markets reopen the week with a positive tone
Wall Street closed last week on a softer note, especially with Amazon’s stock declining 7.6% (following its previous day’s post-close earnings report) and putting a dampener on an otherwise impressive earnings season. Following earlier losses in Asian and European markets, the S&P500 closed down 0.5% while the Nasdaq took a 0.7% hit. The decline in stocks placed downward pressure on bond yields, with the 10Y note declining 5bps to end the week at 1.22%, while the greenback also found favour amongst investors.

Despite some disappointing Chinese PMI data over the weekend – more on this below – today investors appear to have returned to the market in a more positive frame of mind. For reasons that are not entirely clear to us, S&P minis are currently up about ½%. So after a poor session on Friday, it has also been a positive start to the week in the Asia-Pacific region, especially so in Japan and China. In Japan, the TOPIX has advanced a little more than 2% despite new virus cases in Tokyo topping 4,000 over the weekend (with nationwide cases rising above 10,000 for the first time). On a brighter note, Japan’s manufacturing PMI was revised up to 53.0 in June (more on this below). Similarly, in China, the CSI300 is presently up about 2½% despite a notable decline in both the official and Caixin manufacturing PMIs, while the Hang Seng is up 0.9%.

In the Antipodes, Australia’s ASX200 has increased 1.3% (the cash bond market was closed due to a Bank Holiday in New South Wales). Ahead of tomorrow’s RBA policy announcement – in which most commentators appear to expect the Board to defer the modest QE taper it had planned for mid-September – today’s job ads and manufacturing PMI reports pointed to only a modest impact from the Sydney lockdown, at least so far. However, a greater impact is likely next month with the Sydney lockdown set to continue until at least the end of this month (new case numbers have moved back above 200 over the past two days). Meanwhile, parts of Queensland, including Brisbane, entered a snap lockdown over the weekend following the discovery of a small number of virus cases. And with further cases discovered over the past day, the Premier has now extended the lockdown until at least Sunday.

Japan’s manufacturing PMI revised up to 53.0 in July; consumer confidence also edges up to pandemic high while vehicle sales lift 3.2%Y/Y
Following last week’s news of a larger-than-expected rebound in IP in June, the final results from the manufacturing PMI survey for July also contained some positive news. After declining modestly in the preliminary report, the headline manufacturing PMI was revised up 0.8pts to 53.0. As a result, the index now stands 0.6pts above the June reading and back in line with the outcome reported in May. Of particular note, the output index was revised up 1.3pts to 51.9 and the new orders index was revised up 1.3pts to 52.8 – now both around 1pt above their June readings. However, the new export orders index was revised up only fractionally, and at 52.3 remained about 1pt below its June reading. The other revisions to the survey’s pricing indicators were mixed, with the input prices index revised up 0.4pts to a new 13-year high of 66.7 whereas the output price index was revised down 0.3pts to 53.3 – the latter still up 1.6pts from June and at the highest level since November 2018.

Turning to the day’s other news, surprisingly the rise in virus cases has not taken a toll on consumer sentiment, with the Cabinet Office consumer confidence index edging up 0.1pts to 37.5 in July – the highest reading since February last year. In the detail, respondents were more positive about employment and incomes but curiously less willing to buy durable goods. Finally, the number of vehicle sales increased 3.3%Y/Y in July. While this was down from growth of 9.2%Y/Y in June, this reflected less favourable base effects rather than any weakening of demand in July. Sales of cars increased 2.5%Y/Y, but were still more than 17% down compared with July 2019 levels. While sales of trucks increased 9.0%Y/Y, sales of buses were down 33.3%Y/Y, even after being down almost 38%Y/Y a year earlier.

Tokyo CPI ahead in Japan tomorrow; final services PMI, wage and consumer spending data due later this week
Looking ahead, the remainder of this week’s Japanese diary begins tomorrow with the release of the advance Tokyo CPI for July, which will doubtless continue to portray both headline and core inflation as tracking close to zero despite the price pressure evident at the PPI level (albeit mainly in the manufacturing sector). The final services PMI for July will be released on Wednesday and will probably maintain the virus-induced contraction seen in the flash report. At the end of the week, attention will turn to news on consumer spending and incomes. The former includes the BoJ’s Consumption Activity Index, which fell heavily in May so that even a likely rebound in June will be insufficient to avoid contraction in Q2. The MHLW’s Monthly Labour Survey for June is also released on Friday. As base effects unwind, annual wage growth should slow from the 1.9%Y/Y reported in May.

China’s manufacturing PMIs disappointed in July; quiet week ahead, although July trade data will be released on Saturday
The focus in China today was on the results of the latest ‘official’ PMIs for the manufacturing and non-manufacturing sector, which were released back on Saturday. Unfortunately, the news was weaker from both the manufacturing and services sector – albeit continuing to point to ongoing expansion – perhaps reflecting virus outbreaks and associated restrictions on activity in parts of China and elsewhere in Asia.

The closely-watched manufacturing PMI declined 0.5pt to 50.4 in July. This outcome, which was below the consensus expectation, was the weakest result since February last year (when the PMI had plunged to 35.7). While the PMI for large firms was steady at 51.7, the PMIs for medium- and small-sized firms declined to 50.0 and 47.8 respectively – a weakening that was verified by today’s SME-focused Caixin manufacturing PMI, which also declined a greater-than-expected 1.0pt to a 15-month low of 50.3. Returning to the official survey, the output index fell 0.9pts to a 17-month low of 51.0, while the new orders index fell 0.6pts to a 14-month low of 50.9. Perhaps reflecting disruptions caused by the rise in virus cases in Asia, the new export orders index fell 0.4pts to a notably sub-par 47.7. Supplier delivery times shortened somewhat but remained longer than usual, pointing to continued bottlenecks affecting production. After declining sharply last month, the input prices index increased 1.7pts to 62.7 while the output prices index increased 2.4pts to 53.8 – both remaining considerably below the average levels prevailing during the first half of this year.

After weakening considerably last month, the news from the non-manufacturing sector was also slightly softer again this month, albeit in line with the consensus expectation. The headline PMI declined 0.2pt to a five-month low of 53.3, albeit still much firmer than the 51.4 reading registered in February. The new orders index inched up 0.1pt to 49.7 but the business activity expectations index nudged down 0.1pt to a six-month low of 60.7 (albeit still about in line with the average reading over the past decade). As with the activity indicators there was little change in pricing indicators, with the input prices index edging up 0.1pt to 53.5 and the output prices edging down 0.1pt to 51.3.

Looking ahead, aside from Wednesday’s release of the Caixin services PMI for July, there are no further releases during the Monday-Friday working week. However, China will release its international trade report for July on Saturday, which will be of particular interest in light of the aforementioned PMI data. According to Bloomberg’s survey, the consensus expects the overall trade surplus to be similar to the $51.5bn reported in June. However, in dollar terms, growth in exports is forecast to slow to 20%Y/Y from 32.2%Y/Y in June, while growth in imports is expected to slow more modestly to 34%Y/Y from almost 37%Y/Y in June.

Euro area retail sales and national IP data due for release
After the confirmation on Friday of a return to positive GDP growth in Q2, this week’s hard data flow will provide more clarity into sectoral performances at the end of the second quarter. In particular, euro area retail sales figures for June – due for release Wednesday – are expected to show that spending on goods rose for the second successive month, albeit likely at a softer pace than the 4.6%M/M surge seen in May as consumption on services resumed. This morning’s German retail sales data beat expectations, reporting growth of 4.2%M/M in June following a rise of 4.6%M/M in May as coronavirus restrictions continued to be eased. That left sales some 9.0% above the pre-pandemic level in February 2020 and just 0.6% below the series high recorded in November last year. It also meant that retail sales rose a vigorous 4.6%Q/Q in Q2, illustrating the sizeable contribution of consumption to the rise of 1.5%Q/Q in GDP last quarter. July car registration figures from the largest four member states are also due in the first half of the week and expected to show that sales remain subdued compared with pre-Covid trends as production continues to be impeded by supply difficulties. This was the message from the French figures which showed that sales were down 35%Y/Y in July.

Focus at the back end of the week will turn to manufacturing, with German factory orders data due on Thursday and German IP numbers on Friday, with the latter expected to show that output posted a modest increase in June. But this seems unlikely to have offset weakness earlier in the quarter, to leave output down in Q2 compared with Q1. June production figures are also due from France (Thursday), Italy and Spain (Friday), with French trade figures also scheduled (Friday). Meanwhile, following Friday’s flash CPI estimate, the coming week’s euro area PPI figures (tomorrow) might provide further insight into price pressures at the factory gate at the end of Q2.

In terms of survey indicators, final manufacturing and services PMIs are due today and Wednesday respectively, with the euro area composite PMI expected to align with the 1.1pt increase to 60.6 – the best since 2000 – recorded in the preliminary release, as the flash services PMI rose more than 2pts to 60.4, the best on the survey in 15 years but the manufacturing output PMI fell 1.7pts to a 5-month low of 60.9. Thursday, meanwhile will bring the July construction PMIs from the euro area and various member states.

BoE meeting the main event in the UK
The main event in the UK will be the BoE’s latest monetary policy announcement on Thursday, which will be accompanied by updated macroeconomic projections. Hawkish noises from two MPC members – Deputy Governor Ramsden and, in particular, external member Saunders – recently suggested that there was a risk that the QE programme might be brought to an early end at this meeting. However, since then, Deputy Governor Broadbent, and external members Haskel and Vlieghe – the latter for whom this will be the final MPC meeting – have suggested that they see no need to tighten policy yet. And so, we expect the asset purchase target to be left unchanged at £895bn, with the full amount to be reached before the end of the year. The MPC will also maintain its forward guidance, stating that it “does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. The decision not to curtail QE early will reflect the BoE’s updated forecasts. While both the near-term profile for GDP and inflation will be revised higher than expected in May, the BoE will continue to forecast GDP to slow and inflation to fall back in 2022 to be close to target by the end of the projection horizon.

It is possible – but far from certain – that, on Thursday, the BoE will also announce the outcome of its review of its tightening strategy. Up to now, the Bank has stated that it would not start to unwinding quantitative easing before Bank Rate has reached 1.5%. It is possible that the Bank could lower that threshold for Bank Rate below 1.5%, while maintaining rate hikes as the primary tool for tightening policy. Alternatively, it could announce a more flexible approach, giving itself scope to adjust the mix and sequence of rate hikes and reductions in the stock of purchased assets according to how economic and financial market conditions unfold.

In terms of data, this week brings the final July manufacturing and services PMIs (today and Wednesday respectively). In contrast to the euro area, the preliminary surveys revealed a further notable drop in the manufacturing and services output indices, suggesting that growth momentum might have passed its peak. Indeed, the flash composite PMI fell a sizeable 4.5pts to 57.7 in July, a four-month low, with a slowing in growth of new orders and difficulties associated with supply bottlenecks and staff shortages. Thursday will bring the equivalent construction PMI, which might also see the headline activity index fall back from the 24-year high (66.3) recorded in June. That day will also see the release of car registrations numbers for July, which are likely to show another solid month of annual growth due to base effects but also flag that ongoing supply constraints continue limit sales.

Another busy week ahead in the US: ISM manufacturing survey and non-farm payrolls bookend the week, with plenty of corporate reporting also due
Another very busy week lies ahead in the US, culminating in the release of the July employment report on Friday. Before we get there, this week diary begins today with a focus on the factory sector. Daiwa America’s Mike Moran expects the ISM manufacturing index to have inched down to a still very robust 60.0 in July, with developments in the employment and supplier deliveries components of particular interest this month (the latter to see whether supply bottlenecks are beginning to ease). The Markit manufacturing PMI should likewise confirm its strong flash reading, while previous orders are likely to have resulted in a modest lift in construction spending in June. Tomorrow will see the release of auto sales data for July and the full factory orders report for June, with Mike expecting a lift in non-durable goods orders to complement the lift in durable goods orders that was indicated in the flash report.

On Wednesday, the ADP employment report and ISM services report for July will be scanned for clues about what Friday’s official employment report might unveil. Given the widening already reported in the advance release of the goods deficit, on Thursday Mike expects a full trade deficit of $74.2bn to be reported for June, up from $71.2bn in May. On Friday, Mike expects the BLS to report a strong 750k lift in non-farm payrolls, building on the 850k gain reported in June. Mike’s forecast is somewhat below the consensus forecast – which is 900k according to Bloomberg – with recent soft ISM employment readings hinting that employers may be having difficulty matching workers to the record job opening on offer. Even so, he expects the unemployment rate to decline 0.2ppt to 5.7% (as does the consensus). The final wholesale trade report and consumer credit data for June close out the data on Friday.

Aside from data, Fedspeak resumes after last week’s FOMC meeting but at this stage the schedule appears very light (Vice Chair Clarida will speak tomorrow on “Outlooks, Outcomes and Prospects for US Monetary Policy”). Meanwhile, it is another busy week for corporate earnings, with around 150 S&P500 companies scheduled to share their quarterly results.

Aussie data robust, but off highs as Sydney lockdown weighs
Ahead of this week’s more important economic data and events (more on these below), today’s Aussie economic diary featured a number of second tier releases. The final results of the manufacturing PMI for July largely confirmed the preliminary findings, with the headline index revised up just 0.1pt to 56.9 and thus still down 1.7pts from the June reading. The output index was revised up 0.5pt to 52.3, but was still 4.1pts down from June, almost certainly reflecting the impact of the Sydney lockdown. The lockdown also further lengthened supplier delivery times, probably contributing to a 1.5pt upward revision to the output prices index to 62.9 – now pipping the May reading as the highest in the survey’s short five-year history. While the new orders index was little changed from the flash report, the new export orders index was revised down a material 2.5pts to a six-month low of 49.2, perhaps also impacted by lockdowns elsewhere.

The Sydney lockdown was also evident in today’s other releases. The ANZ count of job ads fell 0.5%M/M in July, marking the first decline since May last year. Even so, the count remained up 94%Y/Y and the second highest since December 2008. In a similar vein, the CoreLogic house price index increased 1.6%M/M in July, which was the smallest increase since January. Nonetheless, given that prices had declined in the same month a year earlier, annual home price inflation increased to 15.1%Y/Y from 12.4%Y/Y in June, with prices increasing more than 20%Y/Y in Canberra, Darwin and Hobart. Finally, the Melbourne Institutes monthly inflation gauge increased 0.5%M/M in July, but given base effects annual inflation still eased to 2.6%Y/Y from 3.3%Y/Y previous. The trimmed mean also increased 0.5%M/M, lifting annual inflation on that measure by just 0.1ppts to 1.9%Y/Y.

Tomorrow’s RBA Board meeting the near-term focus in Australia; dwelling approvals, retail sales and international trade data also ahead this week
Without a doubt, the key focus in Australia this week is tomorrow’s RBA Board meeting, which will be followed on Friday by the publication of the Bank’s latest Statement on Monetary Policy and an appearance by Governor Lowe before the House of Representatives Standing Committee on Economics. Recall that at last month’s meeting the Bank had announced a mini-tapering of asset purchases once the current programme ends in mid-September, reflecting the continued improvement of economic conditions in Australia. Since that meeting the virus outbreak in Sydney has weakened the near-term outlook for the economy, and provided a considerable headache for the Bank as it considers revisions to its formal economic projections – revisions that would previously have been positive, especially as regards the labour market. We imagine that the Bank will stick with its previous view that the economy will rebound quickly from any outbreak, including that in Sydney, so that the Bank’s medium-term projections may still point to the possibility of policy tightening in late 2023, at least as far as an upside scenario is concerned. However, the Board – which remains fundamentally dovish – may feel the need to respond to this outbreak, especially given its previous indication that it was willing to respond to events as they unfold. So many local commentators expect the Board to announce that it will deter the tapering of its asset purchases, or at the very least announce that its previous decision to taper its asset purchases will be reviewed at the September meeting, taking into account developments in Sydney over that period. Indeed, at least one prominent commentator has suggested that the Board may go as far as boosting the Bank’s near-term purchases, although it is unclear that this is necessary given that bond yields and the Aussie dollar have already declined in reaction to the virus outbreak.

On the data front, there are also a number of key economic reports ahead over the remainder of this week. Tomorrow the focus is on housing, with the ABS releasing data on building approvals and housing finance for June. On Wednesday, the final retail sales report for June is likely to confirm the 1.8%M/M decline in spending indicated in the preliminary report, which reflected the impact of lockdowns in the state of Victoria and the beginning of the Sydney lockdown. Even so, given strong growth in prior months, retail volumes are likely to have increased solidly. The final outcome of the service sector PMI for July is likewise likely to confirm the Sydney-driven slump indicated in the flash report. On Thursday, again taking the lead from previously-released data from the goods sector, the full trade surplus is likely have topped $A10bn in June for the first time ever.

The labour market will be the focus in New Zealand this week as key RBNZ meeting looms
There were no economic reports in New Zealand today. Moreover, aside from tomorrow’s Corelogic home price index for July, all of the action this week will take place on Wednesday when the key quarterly labour market data for Q2 will be released – data that the market expects will provide further justification for the RBNZ to begin lifting the Official Cash rate from the current record. Given strong business survey and job ads readings, Bloomberg’s survey indicates that the consensus expects a sturdy 0.7%Q/Q lift in unemployment, which is expected to lower the unemployment rate to 4.4% - just fractionally above the pre-pandemic low. Moreover, in part reflecting another lift in the minimum wage, private sector labour costs – measured on a quality-adjusted basis – are expected to have increased 0.6%Q/Q, which would be the most since Q419. 

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