Japanese manufacturing PMI signals contraction in output

Emily Nicol

BoE expected to hike Bank Rate by 50bps and publish its plans for active Gilt sales
In terms of monetary policy, focus this week will turn to the BoE’s announcements on Thursday. While there is no doubt that Bank Rate will be hiked for the sixth consecutive meeting, expectations for the magnitude of increase are split between 25 or 50bps. The inflation outlook has clearly deteriorated since the BoE last published its economic forecasts in May. The ongoing upwards trend in the services PPI and CPI rates is perhaps suggestive of increased risks of inflation persistence due to the tightness in the labour market, while wholesale gas prices have risen significantly further and raised expectations for the increase in Ofgem’s price in October. So, having stated in June that it “will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response”, we expect the majority on the MPC to favour a larger rate increase of 50bps to 1.75%, with signals of further monetary tightening ahead too (possibly of a similar magnitude). The BoE will also publish its plans for active Gilt sales, which will likely start in September depending on market conditions – Bailey previously suggested that, combined with redemptions, the BoE will likely aim to reduce its stock of Gilts (currently £847bn) by between £50-100bn in the first year.

Japanese manufacturing PMI signals contracting output, household consumption to be boosted by services even as real wage growth remains negative
While Friday’s Japanese IP report recorded a stronger-than-expected rebound in output in June (8.9%M/M) as Covid-restrictions in China relaxed, this still left output down almost 3%Q/Q in Q2. And today’s final manufacturing PMI survey implied that manufacturers were still facing significant challenges. Despite a modest improvement from the flash release, the output PMI was down 0.9pt on the month to 49.7, the first contractionary reading for five months, with the new orders component falling to its lowest since November 2020 (49.2). And ongoing supply-side constraints in the autos sector were evident in today’s new cars sales, which were down 13.4%YY in July. Looking ahead, focus at the end of the week will turn to the latest BoJ consumption activity index and labour earnings figures. Despite a further deterioration in consumer confidence and subdued spending on goods, consumption is likely to have risen in June reflecting increased opportunities to spend on services. Average earnings growth is also expected to have jumped to its highest in more than a year, although given the recent increase in prices, real wage growth will remain negative.

Chinese PMIs flag downside risks to recovery at start of Q3
The latest Chinese PMIs disappointed at the start of Q3. The government’s official manufacturing output index fell 3pts in July to 49.8, with the new orders component similarly back in contractionary territory (48.5) and business expectation for the year ahead declining to its lowest since the start of the pandemic in February 2020, as Covid containment rules were reintroduced in certain cities. But momentum in the services sector also faded, with the headline activity index down 0.9pt to 53.8, admittedly still pointing to expansion. But the new business PMI fell back below 50 raising concerns about the near-term outlook. Overall, the official composite PMI fell 1.6pt in July to 52.5, suggesting some slowing economic momentum following the initial post-lockdown boost in June.

US ISM surveys and employment report key focus in the week ahead
A busy week for top-tier US economic releases kicks off today with the July manufacturing ISM survey, followed by the equivalent non-manufacturing ISM on Wednesday. While the flash PMIs signalled a marked deterioration in conditions – the composite index fell into contractionary territory for the first time in more than two years – the headline services ISM is forecast to remain firmly above the key 50-level (54.0), albeit this would mark its softest reading since May 2020, while there are potential downside risks to the manufacturing output and orders indices. And having fallen into contractionary territory in June, the ISM employment indices will also be closely watched ahead of Friday’s labour market report. Our colleagues in Daiwa America expect non-farm payrolls to have risen 275k in July, a touch above the Bloomberg survey consensus but nevertheless well down on the average increase during 2021 (562k) as concerns of possible recession weigh. However, this should be strong enough to see the unemployment rate unchanged at 3.6%.

Euro area unemployment and retail sales figures for June due, along with final July PMIs
While Friday’s flash euro area Q2 GDP estimate surprised on the upside, this week’s euro area retail sales figures (Wednesday) are likely to show that sales remained very subdued in June, to leave them down over the second quarter as a whole. Wednesday will also bring euro area PPI data for June, which will show that price pressures remained elevated at the factory gate with evidence that higher input costs were being passed along to consumers. Ahead of this will bring the latest euro area unemployment figures (today), which are likely to see the jobless rate move sideways at June’s record-low 6.6%. The final manufacturing PMIs for July are also due today and expected to confirm the marked decline in the output component (down 3.2pts to 46.1) recorded in the preliminary release. The second half of the week will bring national manufacturing releases from the member states, including German factory orders and IP (due Thursday and Friday respectively). 

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