A Widening Gap Around the World Between Service Sector Activity and Manufacturing Conditions
April 21, 2023
The dollar rose overnight by 0.6% against the Australian and New Zealand dollars and 0.4% relative to the Canadian dollar and sterling but also slid 0.3% vis-a-vis the Japanese yen and 0.1% against the euro and Mexican peso.
Ten-year sovereign debt yields rose four basis points in Italy and three bps in Germany, France and Spain but dipped a basis point in the UK.
U.S. stock futures are generally flat. Stock markets fell Friday in Asia by 2.0% in China, 1.6% in Hong Kong, 0.7% in South Korea and Taiwan, and 0.3% in Japan. European markets softened marginally.
WTI oil‘s price recovered 0.4%, while gold and Bitcoin fell by 1.2% and 0.3%.
The first review of Japanese monetary policy since Kazuo Ueda replaced retired Governor Kuroda is scheduled for late next week. It’s unclear whether this end to Kuroda’s decade-long stewardship will result in an immediate modification in the Bank of Japan’s ultra-loose stance. March CPI data released today showed a 6-month low in Japanese total consumer price inflation of 3.2% and an unchanged 3.1% on-year rise in CPI excluding fresh food. A 2-year low in the energy component of -3.8% was the driving force. Consumer price inflation excluding both perishable food and energy accelerated to a 530-month high of 3.8% from 3.5% in February and 3.2% in January. The 0.5% monthly increase in that subset index was the largest in 26 months, and a 7.8% year-on-year increase in food prices was the most in 510 months.
Preliminary reported results of April purchasing manager surveys suggest that while manufacturing is feeling the pinch of less available credit in the wake of last month’s banking system strains, service sector activity is doing better than expected.
Australia’s services PMI index printed at a 10-month high of 52.6 (versus 48.6 in March), while the manufacturing index fell a full point to 48.1, a 35-month low that signifies the fastest pace of contraction in nearly three years. Services represent a much greater share of GDP than manufacturing, so Australia’s composite PMI also climbed to a 10-month high that at 52.2 was considerably above market expectations.
Japan’s composite PMI of 52.5 in April was lower than forecast and at a 2-month low.
Euroland’s manufacturing index (45.5) was also at a 35-month low, but the services and composite PMI readings of 56.6 and 54.4 both exceeded expectations and were at respective 12- and 11-month highs. That’s a good start to the second quarter, reflecting “diminishing fear of a resurgence of the energy crisis, supply chains that are functioning better, and the expectation that inflation has passed its zenith.” There is a hope, too, that a pause in ECB tightening is coming soon.
Within the euro area, Germany and France had similar composite PMI scores of 53.9 and 53.8 in April. French service sector activity exhibited no discernible drag from the street protests against President Macron’s hike in the minimum age for retirement pensions.
Great Britain’s composite PMI rose 0.7 points to an 11-month high of 54.4. Services rose unexpectedly to a one-year high of 54.9, while the manufacturing reading dropped 1.1 points to a 4-month low and continuing sub-50 score of 46.6.
British retail sales dropped 0.9% in March after increasing 1.1% in February and 1.2% in January. A 3.1% 12-month rate of decline in sales was the smallest drop in a year. A separate data report on British consumer confidence put such at a 14-month high of -30, 19 points better than last September’s record low.
Euroland’s fiscal deficit-to-GDP ratio of 4.7% in the final quarter of 2022 was at a 6-quarter high and up from 2.6% in the first quarter when Russia invaded Ukraine. In the latest quarter, the Dutch and German deficit ratios of 1.4% and 3.2% were considerably below those of 6.1% in France and 7.6% in Spain. As a percent of GDP, Euroland collective debt settled back to 91.6% from 95.5% a year earlier, but ranged from 51.0% in the Netherlands and 66.3% in Germany in the latest quarter to 144.4% in Italy and 171.3% in Greece.
South Korean producer prices rose just 0.1% on month in March, and the 3.3% 12-month rate of increase was the lowest since February 2021. Consumer price inflation in Hong Kong last month matched February’s 9-month low of 1.7%. Moroccan consumer price inflation fell sharply below February’s record high of 10.1% to a 3-month low of 8.2% last month.
Comments from FOMC members Mester and Waller were hawkish in tone, making clear that the federal funds rate will need to rise additionally, but Mester wouldn’t commit to saying if a pause at May’s meeting might be appropriate.
The S&P Global-compiled U.S. April purchasing managers survey contains evidence of accelerating growth but also worrisome inflation developments. As recently as January, the composite, manufacturing, and service sector PMI readings of 46.8, 46.0, and 48.6 were still signalling contraction on all cylinders. But April’s preliminary readings increased further to 53.5, an 11-month high composite score, with services (53.7) at a one-year high and manufacturing finally moving above 50 to a 6-month high of 50.4. However, and this is a big dark cloud, the input and output price indices for both goods and services accelerated to 7-month highs, helping to explain why core inflation measured by both the CPI and personal consumption price deflator has been so resistant to deceleration. The Fed will not less this development go unanswered.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British retail sales and consumer confidence, Euroland deficit- and debt-to-GDP ratios, Japanese consumer prices, preliminary April 2023 purchasing manager survey results
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