Euro area PMIs reverse on French political uncertainty

Euro area PMIs show slower but still decent growth with price pressures easing

• EUR: Euro Area June (flash) PMIs disappoint in June with delayed rate cuts, sluggish global manufacturing and French election uncertainty all contributing to the slower outlook. The euro area June (flash) manufacturing PMI comes in at 45.6, below consensus for 47.9 and the prior month’s 47.3. The euro area June (flash) services PMI also disappoints, coming in at 52.6 against consensus looking for 53.4 and the prior month’s 53.2. This sees the euro area June (flash) composite output PMI drop to 50.8 against consensus looking for 52.5 and the prior month’s 52.2.
   
• EUR: In June, there is no sign of any growth improvement, but services outperformances still strengthens. That being said, input and output price indicators in the PMIs ease in June, albeit from still high levels and employment growth also slows, adding to the dovish flavor Some of the decline in the composite PMI in June could be down to seasonals— since Covid, the lack of seasonal adjustment means the PMI is rising early in the year and then rolling over midway. In any case, the 1.3 point decline in the PMI in June—which follows five straight increases—is not enough to prevent the index from rising in Q2 overall compared to Q1; the index averages 51.6 in Q2 after 49.2 in Q1, pointing to still decent growth.
   
• EUR: Country – wise, output growth slows in Germany in June while private sector activity falls faster in France, most likely in part due to the surge in political uncertainty there. The S&P Global/HBOC press release notes that growth in the rest of the eurozone is positive but also slows. Finally, inflationary pressures ease further according to the PMIs which will be welcomed by the ECB. Admittedly, input prices in manufacturing rise for the first time since February last year but in services, the pickup in input prices eases to the slowest since April 2021, likely a reflection of easing wage growth. As a result, services firms raise prices at the slowest pace since May 2021.

UK’s June PMI drop led by services but weaker growth offset by higher inflation pressures

• GBP: UK’s S&P Global/CIPS composite (flash) PMI falls to 51.7 in June from 53.0 in May, below consensus looking for 53.0. It is a weighted average of the services PMI (which falls to 51.2 in June, again below consensus for 53.0 and from 52.9 in May) and the output index of the manufacturing survey (which rises to 54.2 in June from 53.4 in May) with UK’s manufacturing PMI increasing to 51.4 from 51.2, above consensus for 51.1.
   
• GBP: UK’s composite PMI falls to its lowest level since November 2023, supporting the case for the MPC to cut rates in August. S&P Global says that “survey evidence indicates that the slowdown is partly driven by a pause in client spending decisions during the election period.” This suggests the PMI are likely to bounce back in July following the election results. Meanwhile, rising price pressures signaled by the PMIs pose a challenge.
   
• GBP: In the details, the composite new orders index holds steady at 51.6 in June, while employment growth slows with the balance dropping to 50.3 in June from 50.6 in May. Confidence in future output also falls to a still solid 69.6 in June, from 72.5, and still above its long-run average. The weaker growth news is partly offset by a rise in inflation pressures with the composite input price balance jumping to 61.3, from 59.6 in May, with S&P Global reporting that “severe global shipping constraints” are boosting transport costs. Meanwhile, wage growth is the key driver of higher services input price inflation with the prices charged index of the composite PMI rising to 56.5, the highest since February and the services PMI output price balance rising to 57.0, the strongest since March.

UK retail sales – offering upside risks to UK Q2 GDP

• GBP: In yet another sign of the UK economy’s rebound, headline retail sales volumes rise 2.9% MoM in May, above consensus for 1.8% and April’s MoM growth rate is revised to -1.8% from -2.3%. This sees year-over-year growth improving to 1.3% in May, from -2.3% in April, well above consensus looking for -0.6%. The volatility in retail sales from month to month can disguise the underlying trend. But retail volumes were not collapsing in April and neither are they booming now. YoY retail sales volumes growth is steadily, if unspectacularly, trending up as consumers’ real income growth improves and goods inflation slows relative to services. With households already saving a larger fraction of their incomes than usual, further increases in disposable income will likely feed through to overall spending.

Week Ahead:

US – the first US presidential election debate, core PCE and the Conference Board’s consumer confidence report in focus this week

• USD: The first debate between the Presidential candidates Biden and Trump will be held this Thursday, giving them an opportunity to elaborate on their policy plans. Heading into the debate, polls show former President Trump is leading in most swing states.
   
• USD: US May PCE Deflator MoM – Citi: 0.0%, median: 0.0%, prior: 0.3%; PCE Deflator YoY – Citi: 2.6%, median: 2.6%, prior: 2.7%; Core PCE MoM – Citi: 0.2%, median: 0.1%, prior: 0.2%; Core PCE YoY – Citi: 2.6%, median: 2.6%, prior: 2.8% - based on details of CPI and PPI, Citi Research expect a 0.15%MoM increase in core PCE inflation in May, technically rounding to a 0.2%MoM but with clear risk of a softer 0.1% increase. But regardless of 0.2% or 0.1%, May core PCE inflation should slow markedly compared to 0.25% in April, with the YoY rate dropping from 2.8% to 2.6%. Most notably, various services prices in CPI slowed in May. Core goods prices should also decline with a boost from pharmaceutical prices offset by declines in certain recreation equipment prices and cars. Headline PCE should be flat on the month but would be close to rounding to a 0.1%MoM increase. This would mean headline PCE also pulls back to 2.6% on a YoY basis.
   
• USD: US May Personal Income – Citi: 0.4%, median: 0.4%, prior: 0.3%; Personal Spending – Citi: 0.3%, median: 0.3%, prior: 0.2%; Real Personal Spending – Citi: 0.3%, median: 0.2%, prior: -0.1% - US personal spending should rise 0.3%MoM in both real and nominal terms. Real services spending has been slowing since February and Citi Research expect most of the growth in real consumption to come from goods spending this month. Meanwhile, personal income should rise 0.4%MoM in May, boosted by wages and salaries and asset income. Shelter inflation, which has been a somewhat good signal for broad trends in rental income these past few months, has slowed recently, suggesting growth in rental income should be relatively modest.
   
• USD: Conference Board Consumer Confidence – Citi: 98.5, median: 100.0, prior: 102.0 – the sentiment index in the University of Michigan report was weaker than expected in the June preliminary report as inflation expectations remained elevated. The Conference Board Consumer Confidence Index also has generally moved lower since the start of the year. Lower gas prices and slower realized inflation could help support consumer sentiment somewhat but risks to the sentiment remain to the downside as the labor market has been loosening quickly. Markets will also be paying close attention to the labor market differential in the report which has been generally falling. With job openings continuing to fall, the labor market differential could fall further as a larger share of people will likely report that jobs are not as plentiful or are hard to get.

Europe, UK – euro area HICP, German ifo, UK Q1 GDP, Riksbank meeting and the EU summit in focus this week

• EUR: Eurozone June HICP (flash) – preliminary inflation data from several EA countries this week (except Germany among the big ones) may send opposite signals, but for the euro zone aggregate (out 2 July), Citi Research see headline HICP softening to 2.4% YY from 2.6% in May and core from 2.9% to 2.7%, with risks of 2.8%. Meanwhile, the ECB will release its consumer inflation expectations survey. ECB: CES Inflation Expectations, 1Yr, May – Citi Forecast 2.8%, Prior 2.9%.
   
• SEK: Riksbank rate decision— Citi Research expect the Riksbank to hold rates steady at 3.75% this week, but to keep the door open for a second rate cut already in August. The Swedish central bank appears to have more reasons to ease monetary policy than its peers. Riksbank Policy Rate, June – Citi Forecast 3.75%, Consensus 3.75%, Prior 3.75% (lower rate path).
   
• EUR: EU summit: The 27/28 June summit is potentially the last before far-right or far-left parties win the French parliamentary elections and reduce President Macron’s room for maneuver further. Citi Research see a chance that this creates a path for former ECB President Mario Draghi to become European Council President and thus agenda setter as the EU struggles for internal and increasingly external cohesion. Fiscal policy in the context of the EDPs may also play a role.
   
• EUR: German Ifo survey (Monday) – the German PMIs fell sharply in June, and Citi Research also expect a soft Ifo print for Germany. The French election turbulence, the hesitant ECB, rising trade tensions with and weak demand from China all play a role. German Ifo Business Climate, June – Citi Forecast 89.0, Consensus 89.6, Prior 89.3; Ifo Expectations, June – Citi Forecast 90.0, Consensus 90.8, Prior 90.4; Ifo Current Assessment, June – Citi Forecast 88.0, Consensus 88.5, Prior 88.3.
   
• UK: Q1 Quarterly National Accounts – this week will see the publication of the quarterly national accounts for Q1. Citi Research see the risks as skewed towards a marginal downward revision, with input prices generally growing slower than output equivalents – although this can take until the Blue Book to fully crystalize. The trade data that underpinned the upside surprise in Q1 is also highly uncertain. More important here however, will be to take stock of the more detailed data around household income, savings, and firm profitability. Citi Research expect the savings rate to moderate modestly into Q1, with real income growth likely accelerating. UK Quarterly National Accounts, GDP, Q4 – Citi Forecast 0.5% QQ, Consensus 0.6% QQ, Prior 0.6% QQ (possible downward revision).

Japan – Tokyo core CPI in focus this week

• JPY: Tokyo core CPI to increase 2.0% YoY in June — Citi Research expect core CPI in Tokyo (the CPI excluding fresh food) to increase 2.0% YoY in June, up slightly from a 1.9% YoY advance in May. Following the halving of government subsidies electricity and gas prices likely increased in the month. Citi Research expect a further rise in July when the subsidies will be terminated. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, will probably moderate from +1.7% YoY in May to +1.6% YoY in June. The base effect from sharp markups a year ago will likely probably push down YoY inflation for goods.

Commodity Bloc – Australia and Canada May CPI and Canada’s CFIB business barometer in focus this week

• AUD: Australia May CPI Indicator YoY: Citi forecast; 3.8%, Previous; 3.6% - Citi Research forecast a 3.8% YoY increase in the May monthly CPI. The crucial aspect of May CPI is not the headline 3.8% increase, but the components of the price rise. The focus should be on the broader services inflation categories, which are mostly measured in the second month of the quarter. There is little high frequency data to track these service categories, so there is a large degree of variance around estimates. If prices of services accelerate further, Citi Research see upside risks to their underlying inflation forecast of 0.8%.
   
• CAD: Canada CPI NSA MoM (May) – Citi: 0.3%, median: 0.3%, prior: 0.5%; CPI YoY – Citi: 2.6%, median: 2.6%, prior: 2.7% - Citi Research expect a 0.3%MoM increase in headline CPI in May, softer than last month with two-sided risks and a further modest easing in YoY inflation to 2.6%. There should be some continued strength in shelter inflation in May, as new home prices have started to rise again in April and May for the first time since 2022. While this will imply a boost from the homeowners’ replacement cost component in both May and June CPI, the increases have been modest. There may also be a more moderate increase in rents in May that would be encouraging for BoC officials. Core inflation will continue to be one of the most important aspects of monthly inflation reports, with further slowing in 3-month core inflation in May and June data likely to help support a cut again in July.
   
• CAD: Canada CFIB Business Barometer (June) - the biggest risk to BoC rate cuts at every meeting this year would be if inflation remains stuck well above target while activity holds up. In the near term, soft monthly core inflation for the last few months suggests that 3-month core should remain close to target in upcoming May and June data. Citi Research expect this, along with downward revisions to growth forecasts in the July MPR, will prompt another 25bp rate cut by the BoC in July. But upside risks do remain for May and June data and especially beyond these months it is not clear that inflation will consistently continue to ease. CFIB prices plans, the preferred leading indicator of core inflation, have largely moved sideways around 2.5-3.0%. A further pullback in CFIB price plans would further solidify our expectation of rate cuts also following in September, October, and December.

Asia EM – Singapore’s CPI and China’s official manufacturing PMI in focus this week

• SGD: Singapore CPI (%YoY) May – Citi Forecast 3.1, Consensus 2.8, Prior 2.7; CPI (%MoM) – Citi Forecast 0.0, Prior 0.1; Core CPI (%YoY) – Citi Forecast 3.1, Consensus 3.0, Prior 3.1; Singapore Industrial Production (SA, %MoM) May – Citi Forecast -3.8, Consensus 2.4, Prior 7.1; Industrial Production (%YoY) – Citi Forecast -3.2, Consensus 2.5, Prior -1.6.
   
• CNH: China Manufacturing PMI June – Citi Forecast 49.5, Prior 49.5 – Citi Research expect the official Manufacturing PMI to remain around 49.5 in June. So far this month, the operation rates of heavy industries such as asphalt and cement have notably declined compared with May. The persistent demand weakness could be starting to erode supply strength. Export orders should remain resilient ahead of new tariffs, with container freight rate up 15.8% in the first two weeks of June.