German flash PMIs give off clear recession vibes overshadowing better-than-feared French survey
In the euro area, the flash PMIs for the bloc will be published shortly. After yesterday’s preliminary consumer confidence index from the Commission registered a drop to a series low, the flash PMIs are expected to point to a further deterioration in business conditions at the end of Q3. Certainly, the euro area composite output index is forecast to record a third consecutive contractionary reading in September, and seems highly likely to fall below the 18-month low of 48.9 logged in August.
Indeed, the German indices just released gave off clear recession vibes, as the composite index dropped a little further than expected, by 1pt to 45.9, the lowest since the first wave of Covid-19. While the manufacturing output index was a touch firmer in September at 47.0, it was still consistent with ongoing retrenchment as heavy industry cuts its reliance on Russian gas. And the services survey was much weaker than expected, with the activity index down more than 2pts to just 45.4, a 28-month low. Over Q3 as a whole, the picture was not at all pretty. In German manufacturing, the output index was down 3.6pts from Q2 while the new orders index was down a whopping 6pts. And in services, the activity index was down more than 7pts from Q2 with new orders also down more than 5pts on the quarter.
However, there was a welcome upside surprise to the French survey, reflecting a rebound in the services sector – indeed, the services activity PMI jumped 1.8pts to 53.0. Nevertheless, given a further marked decline in the manufacturing output PMI (down more than 3pts to 43.4, a 28-month low), the improvement in the composite PMI was more modest (up 0.8pt to 51.2) and therefore still consistent with slowing economic momentum over the third quarter as a whole. Indeed, the average composite PMI in Q3 was a sizable 4.6pts lower than in Q2. And we caution that the French PMIs are often revised significantly from their flash estimates.
Consumer confidence in the UK slumps to fresh series low; flash PMIs to be downbeat too, while government will present its new tax-cut strategy
According to the GfK’s latest sentiment survey, UK consumers have never been so downbeat. Despite the government’s announcement of a price cap on household energy bills from October for two years, the headline confidence indicator fell a further 5pts in September to -49, the lowest since the series began in 1974. Within the detail, the weakness was unsurprisingly broad-based. Faced with near-double-digit inflation, the sharply rising cost of borrowing, and declining real incomes, households were notably more downbeat about their expected financial situation over the coming twelve months – indeed, the relevant survey gauge fell a further 9pts to a record-low of -40, some 12pts lower than at the end of Q2 and 51pts lower than the peak last August. And not least given ongoing concerns surrounding the war in Ukraine and the slowing global economy, expectations about the general economic outlook also deteriorated markedly – the survey component slumped 38pts (more than reversing August’s surprise 27pt increase) to -68, similar a series low.
Against this backdrop, it was somewhat surprising that households considered the climate for making major purchases to be no materially worse over the month, although the survey index was still historically weak at -38, to be 3pts lower over the third quarter as a whole, a whopping 37pts lower than the long-run average, and therefore suggestive of a decline in spending on big-ticket items this quarter. Not least reflecting the further 50bps hike in Bank Rate yesterday, and the prospects of additional rate hikes to come over coming months, as well as the continued expected uptrend in prices of a wide range of items – including food and energy – consumption certainly seems set to remain extremely subdued despite the government’s announcement yesterday of a reversal of April’s National Insurance hike from November. The CBI’s distributive trades survey will be published later this morning and provide more insight into retail sales in September.
The preliminary September PMIs are also due from the UK this morning. With the manufacturing output index expected to signal a steeper pace of contraction and the services PMI expected to imply stagnation, the composite output PMI is currently forecast to fall further below the key-50 expansion level to its lowest level since January 2021.
Attention this morning will also be on UK fiscal policy, with the new Chancellor Kwasi Kwarteng set to deliver at 9.30BST a mini-budget within the context of (yet another) growth strategy. In addition to the government’s pre-announced energy support proposals and yesterday’s commitment to reverse April’s hike in National Insurance Contributions and cancel the forthcoming Health and Social Care Levy, the previously planned corporation tax hike will be cancelled and housing stamp duty will reportedly be cut too.
The assumption is that the tax cuts will be financed by extra Gilt issuance worth several percentage points of GDP over the coming couple of years. But the lack of updated fiscal forecasts and objective costings and scrutiny from the OBR will likely leave plenty of uncertainty about the full implications for the Gilt market. The overall effect will be to push the BoE into even more aggressive monetary tightening over coming quarters. And given the UK’s already gaping current account deficit, sterling and Gilts will remain under downwards pressure and vulnerable to the whims of international investors.
Flash PMIs the sole data release of note to come in the US
In the US, the flash PMIs – which are less closely watched than the equivalent (and currently more buoyant) ISM indices – are also expected to be weak. However, having dropped sharply in August to an unlikely 43.7, by far the lowest since the first wave of pandemic, the services activity PMI is expected rebound roughly 2pts. That, however, would still likely leave the composite PMI little above 46, a level that might ordinarily be considered consistent with a drop in GDP this quarter.
Sunday’s Italian election to bring nationalist Meloni to office at head of populist right-wing coalition; markets likely to be unperturbed at first, but risks lie ahead as economic outlook darkens
Looking just a little further ahead, the main outcome of Sunday’s Italian general election seems to be in little doubt. Final opinion polls conducted before the pre-election blackout period reinforced expectations that the right-wing alliance – of Georgia Meloni’s Brothers of Italy (FdI), Matteo Salvini’s Lega and Silvio Berlusconi’s Forza Italia (FI) – will win a landslide victory, likely securing almost half of the vote, thus winning most first-past-the-post seats and comfortably gaining a sizeable majority in the new (reduced-size) parliament. In part, that will reflect the failure of the many parties on the left and centre to work together to provide a viable alternative. And with FdI having roughly tripled support over the past three years to be polling around 25%, while Lega and FI look pale shadows of their former selves, the nationalist Meloni – who always opposed Draghi’s Government of National Unity and who has a history of views that should normally make markets distinctly uncomfortable, from a desire to ditch the euro to admiration for Hungary’s Viktor Orban – looks firmly set to be invited by President Mattarella to lead the next Italian government, which could well be in office by the end of October.
To make itself more electable, the FdI – arguably the most extreme of three parties to make up the coalition – stated that it now intends to retain membership of the EU and euro, and also has no desire to alter the fundamentals of Italy’s foreign and defence policies. The alliance also claims to maintain a commitment to the main elements of Draghi’s reform programme and 2023 budget plans, as well as the EU budgetary rules, and hence sustain Italian eligibility for Next Generation EU grants and loans. And so, there might seem reason to believe that spreads of BTPs over Bunds will remain broadly stable once the result of the election has been confirmed, particularly if Meloni eventually nominates a market-friendly Finance Minister to give the impression of policy continuity from the incumbent Daniele Franco.
Nevertheless, significant policy differences exist within the right-wing alliance, ranging from issues related to Russia and Ukraine, specific tax rates, new measures to ease the cost of living, and the importance (or otherwise) of fiscal prudence. And in light of the extremely challenging economic outlook, it is possible that fault-lines on budgetary issues could emerge and widen very early in the term of the new government. Among other considerations, it also remains to be seen whether FI will be able to win sufficient seats to be able to have much influence in the next coalition – if not, a government dominated by FdI and Lega would risk the evolution of a more Eurosceptic policy than has up to now been promised. And a two-thirds majority for the right in the parliament, which would open the door to constitutional revision without need for a popular referendum, would undeniably provide a cause for concern for how those powers might be applied.