Asian stocks mixed as Caixin PMIs disappoint, while European markets overlook dire German retail data
Following yesterday’s declines on Wall St. (the S&P500 closed down 0.6%), Asian stocks were rather mixed today. Chinese markets were weaker, with the Hang Seng currently down about ½%, as the Caixin manufacturing PMIs provided a less reassuring picture of economic activity in May than the equivalent official data published earlier in the week. But buoyed by the weaker yen (heading towards ¥129.5/$ for the first time in a fortnight), the Topix closed up 1.4% despite a rather so-so Japanese capital spending survey. US futures are pointing higher too, with European stock markets opening higher despite a dire German retail sales report. Spooked by yesterday’s inflation data, euro govvies have also ignored the German retail data and are again weaker this morning ahead of a speech this evening by ECB Chief Economist Lane, who will likely reaffirm the case for monetary policy normalisation. UST yields are also a few bps higher across the curve. And yields on ACGBs rose 5-7bps across the curve as Aussie GDP rose a slightly bigger-than-expected 0.8%Q/Q and 3.3%Y/Y in Q1, led by household consumption but with inventories also making a large contribution, with growth in Q4 also revised up.

China’s Caixin manufacturing PMIs flag still significant challenges for small manufacturers
Like yesterday’s official government PMIs, the Chinese Caixin manufacturing PMIs, which tend to focus more on the private sector and SMEs, suggested that production conditions improved last month as some pandemic-related restrictions were eased and the authorities added policy support. However, it was not quite as favourable as the official survey, and disappointed expectations somewhat, signalling a slightly softer pace of contraction rather than stabilisation. Certainly, but perhaps inevitably, the survey still suggested that SMEs continued to more acutely impacted by the current challenges than large firms. Indeed, despite rising by 4.7pts in May, the output component stood at just 43.2, the third-weakest reading on the series and still well below the government’s official manufacturing output PMI of 49.6.

Japanese survey points to only modest capex growth broadly in line with GDP estimate
The Japanese MoF’s latest capital spending survey came in a touch softer than expectations, although it seems unlikely to have a significant bearing on next week’s revised Q1 GDP estimate. The survey suggested that private sector capex rose 0.8%Q/Q (5.0%Y/Y), with a similar pace of growth in the manufacturing and non-manufacturing sectors alike. This figure was just below the initial estimate of the national accounts measure of non-residential investment growth in Q1 (1.0%Q/Q), while in real terms capex grew 0.5%Q/Q. Looking ahead, as suggested by recent machine orders data, the outlook for capex remains highly uncertain. While sales increased for the second successive quarter (1.9%Q/Q), profits were up just 0.2%Q/Q possibly reflecting squeezed margins amid higher operating costs as well as some payback for the near-17½%Q/Q increase in Q4.

Vehicle sales and final manufacturing PMIs continue to flag ongoing challenges in Japan
The MoF survey suggested that the transport equipment sector continued to be acutely impacted, with sales dropping 5½%Y/Y and profits down a steeper 11.7%Y/Y. And the monthly new car registrations numbers today signalled ongoing challenges in the sector in May reflecting persisting supply bottlenecks, with sales falling a further 10%M/M at just 161k, the third-weakest May reading since the series began in 1980 – with 2011 impacted by the Great East Japan quake and tsunami and 2020 the onset of the pandemic – to be down 16.7%Y/Y. And despite a modest upwards revision from the flash release, the final manufacturing PM signalled only subdued production growth in May – the output component fell 0.6pt on the month to 51.5 – with the new orders PMI down more than 1pt to 50.4, an eight-month low.

German retail sales plummet at start of Q2 on high inflation and weak confidence
With high inflation eroding real incomes and consumer confidence close to the series low, German retail sales in April plunged 5.4%M/M, the most in a year, to the lowest level since the lockdowns of February 2021. While sales had grown for the prior two months, the drop left the level in April some 4.8% below the Q1 average, perhaps inevitably suggesting the strong likelihood of a marked decline in spending over Q2 as a whole. Food sales slumped 7.7%M/M, the most on the series dating back almost three decades. Non-food sales dropped 4.4%M/M, with sales of clothing and textiles down 4.3%M/M and department store sales down 7.0%M/M. Of course, the German retail sales data are extremely volatile at the best of times, with the timing of the Easter holiday adding a further complication to seasonal adjustment. And with sales in nominal terms down 4.7%M/M, high inflation is unlikely to the sole reason for the weakness in April. With sentiment so weak, however, it would be no great surprise if German household consumption drops for the third successive quarter in Q2.

Euro area unemployment data and final manufacturing PMIs also due
This morning will also bring euro area labour market data for April, with the headline unemployment rate likely to be unchanged at the series low of 6.8%. The final manufacturing PMIs for May are also due – the flash euro area output PMI rose 0.5pt from April to 51.2, suggesting still subdued activity despite hints of a slight easing of supply constraints, a modest moderation in cost pressures and still strong employment intentions.

, Nationwide house prices up for tenth consecutive month
In the UK, the BRC’s shop price index for May inevitably flagged elevated price pressures on the High Street, with the headline rate up 0.1ppt to 2.8%Y/Y, the summer of 2011. This reflected an intensification of fresh food inflation last month, up 1.1ppt to 4.5%Y/Y, the highest for more than a decade as global food prices continue to be pushed higher by the persisting war in Ukraine. And despite retailers offering discounts on clothing, non-food inflation eased only slightly by 0.2ppt to 2.0%Y/Y, still the second-strongest reading since the series began in 2006. And the BRC warned of more price rises on the High Street to come.

There was also an upwards surprise to the Nationwide house price indices last month too, with prices up for the tenth consecutive month and by 0.9%M/M. While this saw a slight slowing in the annual rate, it remained very strong at 11.2%Y/Y. Looking ahead, contrasting with yesterday’s Lloyds Bank business barometer, the final manufacturing PMIs for May are likely to signal that conditions remained challenging this month, with the flash output PMI having declined 2.4pts to just 51.8.

US focus manufacturing ISM and construction spending
In the US, today’s focus will be on the manufacturing ISM survey, with the headline index forecast to have dropped slightly in May (-0.4pt to a still-healthy 55.0) amid a softer pace of new orders and production growth last month. The survey is also expected to point to a deterioration in supplier delivery times amid intensifying supply bottlenecks due to the recent China lockdowns. The latest construction spending numbers for April are also due. A strong performance in multifamily housing starts, along with work on previously started single-family units, suggests another firm advance in residential construction. Moreover, a surge in construction costs could boost nominal activity in all three main categories (residential, business-related, and government).