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Battle of the purchasing managers index (PMIs) for July – US, euro area and UK

USD: US services flash PMI signals contraction, focus shifts to Fed tightening into a slowdown – in data released Friday, the US S&P manufacturing PMI comes in little changed in July, printing at 52.3 compared to 52.7 the prior month though with the orders sub-index falling just into contractionary territory at 49.9 and the new orders sub-index remaining in contractionary territory at 48.6. The employment index also declines to 50.9. Price indices also fall but remain in expansionary (inflationary) territory, with input prices falling to 77.2 while output prices slide to 66.1 from 71.1 the prior month. Meanwhile, the S&P US services PMI index falls into contractionary territory, printing at 47.0 from 52.7 in the prior month with the employment index also dipping but still indicative of expansion at 55.4. As with manufacturing, input prices fall slightly to 74.5 while output prices decline to 60.8. The PMI data also looks to be consistent with the recent weaker US weekly jobless claims and weak Philly Fed business outlook. Combined with the recent weak University of Michigan consumer sentiment index, a cooling US economy points to a 75bps Fed hike this week rather than 100bps.
 
EUR: Euro area PMIs – all 3 German PMIs fall sub 50 for the first time since spring 2020 - led by Germany, the euro area composite PMI (flash) for July falls below the 50 mark for the first time since the pandemic lockdowns end in early 2021, dropping to 49.4 (Consensus 51.0, Citi 50.5, Prior 52.0). In the past, However, even this contraction may be overstating the strength of the outlook for business activity as in times of high inflation the focus of businesses on revenue rather than production volumes risks flattering the PMIs. Meanwhile, the euro area flash manufacturing PMI comes in at 49.6 (Consensus 51.0, Citi 48.5, Prior 52.1) and services PMI at 50.6 (Consensus and Citi 52.0, Prior 53.0). The more serious drop is in Germany with all 3 indexes at sub 50 - July’s flash PMI manufacturing at 49.2 (Consensus 50.7, Citi 47.0, Prior 52.0), PMI Services at 49.2 (Consensus and Citi 51.4, prior 52.4) and the PMI Composite at 48.0 (Consensus 50.2, Prior 51.3). Citi analysts now forecast a (mild) recession in the winter quarters for the euro area as a whole, and from Q3 for Germany. Nevertheless, Citi analysts still expect the ECB to engage in a short but sharp rate hiking cycle with a further 50bps hike in September and October to a 1% deposit rate cap.
 
GBP: Unlike the euro area, UK flash July PMIs prove relatively resilient, with the services PMI printing at 53.3, down from 54.3 in June but above Citi and consensus (at 52.1 and 53.3 respectively) and manufacturing PMI at 52.2 (Citi 52.5, Consensus 52.0). However, despite signaling continued growth, the rate of expansion remains the weakest in 17 months, with softening primarily reflecting weakness in demand. New order volumes across the UK private sector as a whole increase only moderately, with continued expansion increasingly focused on a handful of services sectors still enjoying some limited rebound effects. Both input and output price growth also moderate for the second month running as does employment growth, falling back to a 16-month low. 
 
Week Ahead  - Fed to hike 75bp but watch the US employment cost index
 
USD: Fed FOMC meeting – at this week’s meeting, the Fed will confront a US economy that is slowing. However, Fed Governor Waller and Presidents Bostic, Bullard and Daly all point toward a 75bp hike. While a 75bp hike this week would still be hawkish, there could be some potential dovish risk at this FOMC meeting from possible references to slowing housing data, initial jobless claims rising and the global backdrop softening. Chair Powell might also point to the speed at which financial conditions have tightened or a Waller-type view that neutral policy rates are around 2.25-2.5% and policymakers need to be more cautious with hiking beyond that point.
 
USD: US June Personal Income – Citi: 0.5%, median: 0.5%, prior: 0.5%; Personal Spending – Citi: 1.0%, median: 0.8%, prior: 0.2%; Core PCE MoM – Citi: 0.5%, median: 0.5%, prior: 0.3%; Core PCE YoY – Citi: 4.7%, median: 4.8%, prior: 4.7% - Citi analysts expect a 0.52%MoM rise in core PCE inflation and for the Y/Y reading to remain at 4.7%. Citi analysts expect core PCE to end the year higher than the Fed’s latest forecast of 4.3%.
 
USD: US Q2 Employment Cost Index (ECI – Citi: 1.3%, median: 1.1%, prior: 1.4% - ECI may be one of the most important data releases this week, especially as one recent narrative around a slowing inflation outlook is premised on labor costs moderating in recent months. Citi analysts though expect a strong 1.3%QoQ rise in ECI in Q2..
 
EUR: Recession Watch - Germany Ifo Business Climate, July – Citi Forecast 89.7, Consensus 90.4, Prior 92.3 (gas crisis); Ifo Expectations, July – Citi Forecast 82.5, Consensus 83.0, Prior 85.8; Ifo Current Assessment, July – Citi Forecast 97.0, Consensus 97.6, Prior 99.3; Euro Area Economic Sentiment, July – Citi Forecast 102.5, Consensus 102.0, Prior 104.0 (gas crisis); Industrial confidence, July – Citi Forecast 3.0, Prior 7.4.
 
EUR: Euro area inflation stable but still very high – Citi analysts look for signs that core goods price dynamics, on a MM basis, starts easing, following somewhat softer upstream pipeline pressures. Euro Area HICP Inflation, July – Citi Forecast 8.6% YY, Consensus 8.7% YY, Prior 8.6% YY; Euro area Core Inflation, July – Citi Forecast 3.7% YY, Prior 3.7% YY (temporary downward effect on core).
 
AUD: Australia Q2 CPI - Citi headline forecast QoQ; 2.4%, Previous; 2.1%, Citi underlying forecast QoQ; 1.8%, Previous; 1.4% - Citi analysts upwardly revise their headline CPI estimate by 0.3pp to 2.4% QoQ to imply a yearly rate 6.8%. For underlying inflation, the team also upwardly revises their estimate by 0.4pp to 1.8%, implying a yearly rate of 4.8%. Citi analysts’ inflation forecast is likely higher than consensus due to the team penciling in large increases in energy costs and owner-occupier dwelling costs. If the team’s forecast is correct, or higher, then a 75bp move by the RBA in the August Policy Board Meeting looks more likely.
 
SGD: Singapore CPI (%YoY) June – Citi Forecast 6.6, Consensus 5.8, Previous 5.6; CPI (%MoM, NSA) – Citi Forecast 0..9, Previous 1.0; CPI Core (%YoY) – Citi Forecast 4.4, Previous 3.6; Singapore Industrial Production (%MoM, SA) June – Citi Forecast -5.9, Prior 10.9; Industrial Production (%YoY) – Citi Forecast 4.5, Prior 13.8.
 
CNY: China Manufacturing PMI July – Citi Forecast 50, Previous 50.2 – Citi analysts expect China’s manufacturing PMI to notch down slightly to 50 in July. High-frequency trackers show COVID-19 resurgence has led to limited mobility of the people in the impacted areas, while industrial production and supply chains appear largely intact. Property market sentiment might have been hit by the mortgage non-repayment event and the auto sales have been lackluster so far in July amid fading reopening momentum and purchase tax cut effect.