Assessing July Factory PMIs and Awaiting FOMC Statement

August 1, 2018

A parade of more than twenty purchasing manufacturing indices released today showed weaker July than June conditions by a ratio of five to one.

Today’s FOMC decision is neither expected to entail an interest rate change nor any back-down of resolve following President Trump’s criticism that the Fed has been too quick to raise interest rates. No press conference is scheduled. The statement arrives at 14:00 EDT.

The dollar is flat against the euro but up 0.8% versus the loonie. Upticks of 0.2% have been recorded against the Swiss franc and Aussie dollar and of 0.1% relative to the yen. the dollar also has slipped by 0.4% against the peso and 0.1% vis-a-vis the yuan and sterling.

Share prices in Asia fell 1.8% in China, 0.6% in Hong Kong, and 0.2% in India but rose 0.9% in Japan, 1.9% in South Korea and 1.6% in Indonesia. Markets in Europe have lost 1.1% in the U.K., 1.0% in Italy, 0.5% in Germany, and 0.6% in Spain. U.S. stocks are relatively steady, by comparison, with support from upbeat sales prospects for Apple’s I-Phone.

Oil tumbled another 1.6%. Gold edged down 0.3%.

The most notable market development today is the sharp rise of sovereign debt yields. Ten-year British gilt and Japanese JGB yields are up 6 basis points. Their German and U.S. counterparts have risen 5 and 4 bps.

Manufacturing PMIs last month fell to a 27-month low in Russia, a 21-month low in Italy, 20-month lows in South Korea and Norway, 14-month lows in The Netherlands and Taiwan, 11-month lows in Japan, Poland, Spain, the Czech Republic, an 8-month low in China, a 5-month low in The Philippines, 3-month lows in the United States, Great Britain, and Thailand, and 2-month lows in Vietnam, Canada, Germany, Hungary, India, and Ireland. Australia’s CBA-compiled PMI was at a 23-month low, while the AIG manufacturing PMI for that economy constituted a 9-month low.  Norway’s PMI printed below 50, constituting the first outright deterioration of conditions in manufacturing since November 2016. And the Greek PMI matched June’s 2-month low.

The list of economies with higher PMI readings in July than June is short. Brazil’s 50.5 was above the prior month’s 15-month low of 49.8 but below May’s level. Turkey’s 49.0 was the fourth sub-50 reading in a row, implying worsening conditions, but constitutes a 4-month high because the previous three months had faster rates of deterioration than experienced in July. The Euroland and French PMIs, respectively 55.1 and 53.3, were each at 2-month highs. Indonesia’s 50.5 PMI reading also was at a 2-month high.

President Trump sees a trade wars as a win for some and a loss for others, but the behavior of the July manufacturing PMI’s conforms to economic theory, which postulates that trade wars hurt just about everybody. And make no mistake, the present trade war is still mostly threat. The real shooting is yet to come.

In other developments today,

The Reserve Bank of India raised its repo and reverse repo rates by 25 basis points each to 6.5% and 6.25%. This tightening follows an initial rate increase in early June and was widely expected. A statement explaining the action paints a reasonably good outlook for growth of more than 7.0% and in-target inflation but warns of global risks: “Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth.”

Released second-quarter labor market statistics in New Zealand showed unexpected upticks in the unemployment and labor participation rates, an acceleration in on-year growth of jobs, and a lower-than-forecast 0.2% quarterly advance in average hourly earnings.

ADP’s estimate of U.S. private employment in July showed a much larger-than-presumed 219K advance.

Britain’s Nationwide house price index posted a higher 2.5% on-year advance in July. U.K. shop prices in the month were 0.3% lower than in July 2017.

Japanese motor vehicle sales grew 1.2% on year in July, only the second time this year that sales exceeded their year-earlier level.

In the 12 months through July, consumer prices rose 1.5% in Thailand and South Korea but 3.2% in Indonesia. Producer price inflation in Thailand accelerated to 2.2%.

In its last meeting in mid-June, the FOMC raised its federal funds target range to 1.75-2.0% and released this statement. Today’s announcement is set for 18:00 GMT (14:00 EDT). Meantime, a 1.1% monthly drop in construction spending in June was reported earlier today. That followed a 1.3% increase in May.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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