Weaker Growth, Lessening Inflation, But Central Banks Not Done Tightening
June 23, 2023
Preliminary purchasing manager survey findings for June revealed a surprisingly steep softening of growth and subsiding inflation. However, inflation remains well above target and is exhibiting particular downside rigidity in the all-important service sectors. A slew of central bank policy reviews over the past two weeks elicited hawkish announcements for the most part. All in all, that’s been a recipe for falling share prices and a firm dollar.
In overnight forex market action this Friday, the dollar advanced 1.5% against the hapless Turkish lira, 1.1% relative to the Australian dollar, 0.8% vis-a-vis the kiwi, 0.6% against the euro, 0.5% versus the Canadian dollar, 0.2% relative to the Swiss franc and Mexican peso, and 0.1% versus the yen and sterling.
Stock markets in the Pacific Rim closed down 1.7% in Hong Kong, 1.5% in Japan, 1.3% in Australia, 1.0% in Singapore and 0.9% in South Korea. The Chinese and Taiwanese markets are closed for the Dragon Boat Festival. The German DAX has thus far lost 1.0% today, and other key European stock markets are in the red, too, as are U.S. stock futures. The exodus from riskier assets has been associated with sharply lower 10-year sovereign debt yields, including drops today of 15 basis points in France, 14 bps in Germany, Spain and Italy, 8 bps in the U.K., and 7 basis points in the U.S. Treasury yield.
Pessimism about the global growth outlook has depressed the price of West Texas Intermediate crude oil by 1.5%. The prices of Bitcoin and gold are alternatively up 0.5% and 0.3% so far today.
Among purchasing manager surveys for June reported today,
Japan‘s composite index printed two points lower at 52.3, indicating the slowest positive rate of growth in four months, the weakest business outlook in five months, but also the lowest output and input inflation in five and 22 months, respectively. Japan’s services PMI also slid to a 4-month low, and the manufacturing PMI swung from a 7-month high of 50.6 in May back below the 50 level to a 2-month low of 49.8, conveying modest contraction. The data support the continuing refusal of Bank of Japan officials to make policy a little less accommodative.
Euroland‘s composite PMI dropped 2.5 points to a considerably weaker-than-forecast 50.3 in June. That’s the lowest reading in five months and includes a 37-month low in manufacturing of 43.6. Euroland has already experienced a drop of GDP in two straight quarters, and this report heightens the possibility of yet another dip in the second quarter of this year, especially given the 2.7-point deterioration of the services PMI to a 5-month low.
The preliminary German and French composite PMIs of 50.8 and 47.3 represent 4- and 28-month lows. Germany’s manufacturing PMI sank all the way to 41.0, a 37-month low, and both manufacturing and service sector activity in France had sub-50 reading, meaning an outright contraction.
The British composite PMI fell 1.2 points to a 3-month low. As in Japan and the euro area, manufacturing is performing more weakly than the service sector, but each did more poorly in June than May. Factory sector input price pressures were their least severe since the first quarter of 2016, but that’s little consolation to Bank of England officials after the May CPI data two days ago that revealed no further deceleration from April’s 8.7% 12-month rate of price increase.
Australia’s composite PMI printed at 50.5, a 3-month low and was associated with a 33-month low in factory sector inflation. The report fails to quash the hope of monetary officials that they can achieve a soft landing rather than a recession and may persuade them to extend the pause in monetary tightening.
Among other data reported around the world today,
Japanese CPI inflation slowed unexpectedly from April’s 3-month high of 3.5% to 3.2% in May and was even further from January’s peak of 4.3%. Although an 8.6% on-year jump in food prices was the most in 500 months, core consumer price inflation also subsided to 3.2%. Japanese authorities include energy in core inflation, and that item dropped 3.8% on month and 8.2% on year in May.
British retail sales volume advanced 0.3% in May, which was better than anticipated given the countries stubborn inflation and a great deal of monetary restraint already in the pipeline. Consumers have been a resilient bunch as attested by a 17-month high recorded in consumer confidence also reported today.
Consumer price inflation in Singapore and Malaysia fell to a 15-month low of 5.1% and a 12-month low of 2.8%, respectively, in May. Such had peaked last August at 7.5% in Singapore and 4.7% in Malaysia.
First-quarter GDP growth revisions for the Netherlands and Spain were each upward. Dutch GDP fell 0.3% instead of by the initially estimated 0.7%. Spanish GDP rose 0.6%, revised from 0.5%. Compared to 1Q 2022, Dutch and Spanish GDP increased by 1.9% and 4.2%.
The Bank of Mexico’s interest rate announcement late Thursday confirmed market expectations that the policy rate was being left unchanged at 11.25%, its level since a 25-basis point hike in March. The rate’s pandemic low of 4.0% was not achieved until February 2021, but a cycle of monetary tightening began shortly later in June. The rate ended 2021 at 5.5% and was increased relentlessly by five percentage points in total during 2022. Two increases in the first quarter of 2023 totaled 75 basis points. CPI inflation has subsided to 5.2%, and core inflation is somewhat lower, too. According to a statement released after today’s decision, “the inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks. Thus, in order to achieve an orderly and sustained convergence of headline inflation to the 3% target, it considers that it will be necessary to maintain the reference rate at its current level for an extended period.” The goal is for CPI inflation to converge on 3.0% within the forecast horizon.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Mexico, British retail sales and consumer confidence, Japanese CPI, Preliminary purchasing manager survey results
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