A Sign Emerges that Supply Constraints May Be Easing, but Investors Remain Bearish

July 1, 2022

Today’s been another fine day for the dollar. Thus far, the greenback shows gains of 1.6% against the Australian dollar, 1.5% versus the Swiss franc, 1.3% relative to the kiwi, 0.8% vis-a-vis sterling, 0.4% against the Canadian dollar but just 0.2% against the euro and zero percent against the Japanese yen and Chinese yuan.

Equity markets in the Pacific Rim closed down 3.3% in Taiwan, 1.7% in Japan and Indonesia, 1.2% in South Korea, 1.0% in New Zealand, 0.6% in Hong Kong, 0.3% in China, and 0.2% in India. European markets and U.S. stock futures are respectively marginally higher and marginally lower after suffering through a disastrous second quarter. The ten-year U.S. Treasury and British gilt yields have slipped four and two basis points.

Prices for two so-called inflation hedges like bitcoin and gold have dropped by 4.4% and 0.9% today, even as WTI oil climbed 1.7%.

Among the slew of June purchasing manager manufacturing surveys reported today, declines from May PMI levels are running above increases by a ratio of three to one, but there has been a silver lining, which is evidence that the long-awaited easing of post-pandemic supply disruptions may finally be starting to ease.

  • Euroland’s manufacturing PMI dropped 2.5 index points to a 22-month low of 52.1. All eight members of the euro area with a PMI report showed a slower rate of growth in June than May, and Italy’s 50.9 was at a 24-month low and close to the 50 level that separates positive growth from contraction. Sub-indices for both production and demand printed below 50, and inventories rose as a result. Lessening supply shortages will be a necessary development for inflation to crest.
  • In Eastern Europe, the manufacturing PMIs of Poland and the Czech Republic were below 50 and at 25- and 23-month lows, while the Hungarian index recovered from a big drop in May to a 2-month high.
  • In Nordic Europe, Sweden’s PMI fell to a 23-month low of 53.7, while the Danish and Norwegian indices improved to 8- and 2-month highs.
  • The British manufacturing PMI had been as high as 58 in February but fell by a further 1.8 points to a two-year low in June of 52.8.
  • Russia is using smoke and mirrors to project an image that it is feeling less pain than the West. Russia’s manufacturing PMI was above 50 for a second straight month and at a 5-month high of 50.9 in June.
  • Japan’s PMI reading of 52.7 represents a 4-month low. While India’s PMI printed at a 9-month low of 53.9, China’s manufacturing PMI rose above 50 for the first time since February to a 13-month highof 51.7.
  • Among other reporting Asian economies, manufacturing PMIs fell to 6-month lows of 50.7 and 50.7 in the Philippines and Thailand, a 10-month low of 50.2 in Indonesia, a 2-year low of 49.8 in Taiwan, and 2-month lows of 54.0 in Vietnam and 51.3 in South Korea. Malaysia’s index, in contrast, ticked 0.3 points higher to a 2-month high of 50.4.
  • Turkey‘s manufacturing PMI was below 50 for a fourth straight month and at a 25-month low of 48.1.
  • South Africa’s Absa-compiled PMI fell 2.6 index points to a 2-month low of 52.2.

The Bank of Japan’s quarterly Tankan survey of corporate conditions and expectations showed less favorable manufacturing conditions at midyear than in March but improvement among non-manufacturers that reflected in part lessening restraints on social gathering. On balance, the summary diffusion index for all 9,313 firms participating in the survey rose from zero to +2. The survey also highlighted significant upward revisions in investment spending plans this fiscal year.

Other economic news out of Japan reported this Friday were a 0.1 percentage point rise in unemployment to 2.6% in May, and lower CPI inflation in Tokyo last month of 2.3% overall, but higher measures of core inflation. Excluding just perishable food, inflation rose 0.2 percentage points to 2.1% but was only 0.4% when a 21.7% on-year jump in the energy component is also excluded.

The preliminary estimate of Euroland inflation accelerated half a percentage point to yet another record high in June of 8.6%, which happened to also exceed analyst expectations. A year earlier, inflation had been only 1.9%. Among key components, on-year price rises in Energy of 41.9%, food, alcohol and tobacco of 11.1%, and non-energy industrial goods of 4.3% were each higher than in May, but a downtick in services to 3.4% was enough to lower core CPI by 0.1 percentage point to 3.7%. This report would have looked a lot worse if not for a half percentage point deceleration in German CPI inflation to 8.2%. Inflation in Spain, Greece and Finland each jumped at least a percentage point between May and June.

Indonesian CPI inflation rose 0.8 percentage points to a 5-year and above-target high of 4.35% in June.

In Pakistan, CPI inflation leaped from 13.8% in May to 21.3%, a 138-month high, in June. Producer price inflation in this economy jumped to a record high of 38.9% in June.

The damaging effects of China lockdowns and Putin’s war were reflected in South Korea’s trade balance, which experienced a deficit of $10.3 billion in the first half of this year versus surpluses of $18.3 billion and 10.5 billion in the first halves of 2021 and 2020.

Financial markets still await the U.S. manufacturing PMI release. Canadians are observing Canada Day.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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