Stock Markets Open Third Quarter on a Downbeat Despite Higher Factory PMI Readings

July 1, 2020

Share prices fell 0.8% in Japan and show daily losses so far of about 1.5% in Germany, France, Italy and Spain. The British Ftse is 1.1% weaker, and U.S. futures point to a drop at the open.

Euroland’s June purchasing managers index printed at a 4-month high of 47.4, which is half a point above its preliminary estimate and 14 points higher than April’s low point. Individual euro are PMI scores ranged from Germany’s 3-month high of 45.2 to France’s 21-month high of 52.3. The only other Ezone member whose PMI moved above the 50 breakeven level was Ireland, whose PMI was at a 4-month high of 51.0.

Britain’s June PMI reading of 50.1 matched the preliminary estimate and represents a 4-month high and a 9.4 month-on-month increase from May. April’s low was 32.6.

Japan’s June PMI was revised significantly higher to a 2-month high of 40.1 from the preliminary estimate of 37.8. The 40.1 reading signifies a sharp continuing rate of contraction, nonetheless, and there was other disappointing Japanese data reported today.

  • Most notably were the findings of the Bank of Japan’s quarterly Tankan survey of corporate business conditions and expectations. The diffusion index (DI) for large manufacturers slumped from a value of -8 in December’s survey to a lower-than-forecast reading of -34, its weakest level in 11 years. The DI among large non-manufacturers dropped 25 points to -17, and the DIs for small manufacturers and small non-manufacturers printed at-45 and -26. Among all 9,577 firms participating in the survey, the DI was -31, 27 points lower than in December, and an even weaker result is anticipated from September’s survey. Firms expect sales and earnings to drop 3.9% and 19.8% this fiscal year, but large firms are expecting to increase investment spending by 3.2% in fiscal 2020.
  • Japanese consumer confidence rose 4.4 points in June to a still lowly 28.4. That’s down from 39.0 last December and marks the 14th straight month that consumer confidence was weaker than the 40.0 level.

Most of the other released manufacturing PMI surveys for June showed increases compared to 50. This group includes Australia, Brazil, Indonesia, Malaysia, The Philippines, South Korea, Taiwan, Thailand, Vietnam, India, Russian, Hungary, the Netherlands, Poland, Turkey, Norway, South Africa, Sweden, Denmark, the Czech Republic, and China. However, a month-on-month increase only implies improving business activity if June’s index exceeds the 50 level. Otherwise, it merely represents a slower rate of contraction, and among the above economies, the June manufacturing PMI was above 50 only in the case of Australia, Brazil, Malaysia, Vietnam, Turkey, South Africa, and China.

China’s PMI rose 0.5 points to a 6-month high of 51.2. The ABSA-compiled South African PMI score of 53.9 was its highest in 82 months. Turkey’s 53.9 reading represents a 28-month high, and Australia’s AIG and CBA purchasing manager indices (respectively 51.5 and 51.2) were the highest readings in 4 and 11 months, respectively. Brazil’s factor PMI rose 13.3 points to a 4-month high of 51.6.

The Swiss PMI report was a big disappointment, sliding 0.2 points to a 2-month low of just 41.9. Swiss manufacturers have been hurt not just by the pandemic but also by the franc’s appreciation due to safe-haven demand.

Denmark’s PMI fell 2.3 points to a 2-month low but managed to stay above 50.

The dollar fell 0.5% against the yen overnight. The greenback is alternatively up 0.3% against the euro, 0.2% relative to the Aussie dollar and 0.1% vis-a-vis the loonie, Swiss franc and sterling.

Ten-year sovereign debt yields have climbed 4 basis points today in Germany, 3 bps in the U.K., and 2 bps in Japan and the United States.

The price of WTI oil climbed 1.7%, but that of gold slipped 0.5%.

In central bank news, the Central Bank of Colombia’s policy interest rate was reduced 25 basis points to a record low of 2.50%. The decision drew one dissent. CPI inflation slowed over a half percentage point in May, and both it and expected inflation are now below the 3% objective. Colombia’s labor market has deteriorated recently, and recovery in exports markets will be slow. Earlier in 2020, central bank officials cut their interest rate three other times, each by 50 basis points.

The Swedish Riksbank repo rate was left unchanged at zero percent. It’s been at that level since a 25-basis point hike last December. In mid-March, however, officials at an unscheduled emergency meeting agree to purchase SEK 300 billion of assets during 2020 and to increase loans to banks. Today, those programs were loosened.  The asset program limit was raised to SEK 500 billion and will run through mid-2021, and the central bank will begin purchases of corporate bonds in September. In presenting the results of this week’s meeting, the Executive Board lowered projected CPI inflation to 0.5% this year and 1.4% in each of the following two years, and the projected path of the repo rate now remains at 0% all the way to at least the third quarter of 2023.

German retail sales volume, which had contracted by 4.0% in March and 6.5% in April, far exceeded the expected rebound of 4% in May by leaping 13.9% on month. this swung the year-on-year change from -6.4% in April to +3.8% in May. A separate report from Euroland’s largest member showed the number of unemployed workers rising 69k in June, which was only about half what analysts were anticipating.

Shop prices in the U.K. posted their 13th consecutive year-on-year decline, but the drop of 1.6% in May was the smallest since February. The Nationwide British house price index for June produced the first sub-zero on-year change (-0.1%) since late 2012. That compares with a rise of 3.7% as recently as April.

CPI inflation in Indonesia slowed to a 242-month low of 1.96% in June. Core inflation of 2.26% represents a record low.

Business confidence in Thailand and Mexico improved in June to 3-month highs.

South Korea’s first-half 2020 trade surplus of $11.03 billion was 40.6% narrower than a year earlier. June exports were 10.9% lower than a year earlier.

According to ADP, U.S. private sector jobs grew 2.369 million last month. Although fewer than analysts were predicting, that discrepancy was more than offset by a big revision to May from a drop of 2.76 million reported a month ago to a new estimated increase of 3.065 million workers.

Still to come: U.S. manufacturing purchasing managers index, auto sales, construction spending and minutes from the last FOMC meeting.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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