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Euro area PMIs – services PMI booming, manufacturing lagging

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  • EUR: Euro area PMIs (April flash) show the Manufacturing PMI struggling at 45.5 (Consensus 48.0, Citi 48.0, Prior 47.3) while the Services PMI beats consensus at 56.6 (Consensus 54.5, Citi 54.5, Prior 55.0), leaving the Composite Output PMI also beating consensus at 54.4 (Consensus 53.7, Citi 54.0, Prior 53.7) as strength in services more than offsets weakness in manufacturing and points to upside risks to euro area GDP forecasts. The 0.7 point rise in the flash euro zone composite PMI sees it at a 11-month high and rising for the sixth successive month in April, driven entirely by a surge in services activity and signaling an expansion in euro area economic activity since the start of 2023. The April reading is consistent with euro area real GDP growth close to 1% QQ yet, there is now a very large gap in performance between the two main sub-sectors of the economy - service sector business activity up by 1.6pt to a 12-month high of 56.6 while the manufacturing PMI index drops by 1.8pt to a 35-month low
  • EUR: The survey, is conducted between 12-19 April and shows private sector economic activity has gained momentum at the start of Q2’23 in Europe’s largest countries, with very homogeneous readings in Germany (53.9, +1.3pt), the UK (53.9, +1.7pt) and France (53.8, +1.1pt). For the euro area aggregate, the improved performance stems from faster growth in new orders which expands at the steepest rate since May 2022. Employment also rises at the fastest rate in 11 months, with services sector jobs growth at their highest since July 2007, while employment growth in manufacturing slows to the lowest in 27 months due to falling order backlogs
  • EUR: From an inflation perspective, input cost inflation falls to its lowest level since 2021 and the rate of increase in average prices charged softens to the lowest in 2 years, though both series remain well above their respective long-run average. Manufacturing price pressures also fall dramatically as supplier delivery times shorten, further signaling a continued improvement in global supply chains and pointing to a growing likelihood of negative goods price inflation. The report though highlights a further shifting of input cost pressures from manufacturing, where lower energy prices help cool both input and output inflation, to services and rising wage costs. Overall, the report also highlights upside risks to the OCIS team’s forecasts for euro area 2023 real GDP to rise by 0.8%
  • EUR: In data released earlier in the week, German ZEW Expectations for April fall sharply to 4.1 (Consensus 15.6, Citi 16.0, Prior: 13.0) but the  ZEW Current Assessment comes in better than expected at 32.5 (Consensus -40.0, Citi -41.0, Prior: -46.5). Investors’ economic expectations drop for a second successive month in April and with the ZEW a good indicator of economic turning points, a second successive drop makes a turning point more likely. On the positive side, profit expectations for banks rebounds after the big drop in March, suggesting that it is not financial stress investors are worried about.


UK’s PMIs may extend the temporary relief for sterling but the medium term outlook still remains

  • GBP: UK preliminary PMIs for April show that the UK economy has expanded at its fastest pace in almost a year, providing a strong composite print despite the miss in manufacturing data. The composite PMI output measure rises by 1.7pt to 53.8 in April, beating  consensus estimates for 52.2.  However, as in the euro area, there continues to be a divergence between manufacturing and service PMIs with the former seeing the contraction in manufacturing activity worsen, falling by 1.3pt to 46.6 for April (consensus 48.4), the fastest rate of decline since January, while the latter gains 2pt to 54.9 (consensus 52.8), the highest growth in a year. The report notes that the "contrasting trends for business performance in April largely reflects divergent demand patterns", with manufacturers also noting ongoing supply constraints. Chris Williamson, Chief Business Economist at the S&P puts it best - "the key takeaway is that the economy as a whole is not only showing encouraging resilience but has gained growth momentum heading into the second quarter, the latest PMI reading broadly indicative of GDP rising at a robust quarterly rate of 0.4%."
  • GBP: UK household confidence rises in April, with the GfK survey gaining 5 points to -30 in April, compared to consensus forecasts looking at an unchanged reading. There are broad-based improvements, with the assessment of the economic situation over the next 12 months improving by 6pt to -34, the assessment of personal finances gaining 8pt to -13 and major purchases increasing by 5pt to -28. The improvements are therefore broad based and largely consistent with likely quarterly increases in real wages in Q2. Personal financial expectations – which remain the best guide to consumption prospects, are now in line with the trough during the Great Financial Crisis. The key question here is whether the data could now build some momentum through Q2 and Q3 into positive territory. This still looks unlikely.  
  • GBP: Meanwhile, UK retail sales decline by 0.9% MM in March after a revised 1.1% MM gain in February. The Y/Y print matches expectations of a 3.1% YY drop in March after a revised 3.0% YY fall in February. Retail sales (excluding auto fuel) also decline by 1.0% MM in March after a downwardly revised 1.4% MM gain in February. The Office for National Statistics notes that adverse weather conditions are partly to blame for the drop, against the more challenging backdrop of declining real household incomes, elevated inflation and higher mortgage repayments. The data therefore highlights some idiosyncratic features but there still remain signs of consumer stress with the trend in most discretionary spending categories remaining weak. Alongside the GfK data, these data suggest that while a sudden further deterioration in consumption may not be in play, nor are there signs of a return to positive consumer momentum.


US PMIs rebound but inconsistencies with ISM data makes for a cautious reading

  • USD: S&P’s US April PMI Indices increase further for the fourth month in a row contrary to consensus expectations for a slight pullback. The S&P Manufacturing PMI rises to above 50 at 50.4, indicating some modest increase in manufacturing activity in April. Strength is broad-based across the subindices with the output index increasing to 52.77 from 50.19 and the new orders index up at 50.2 from 48.6. The employment index also gains to 53.45 from 51.92 while input and output price indices rise by about 4 points each. The S&P Services PMI also increases by 1 point to 53.69 from 52.65 with the new business index up by a larger 2.57 points to 53.79 from 51.22 and the employment index increasing by 1.5 points. Overall growth in private sector employment is the quickest since last July as goods producers and service providers show some success in efforts to expand capacity. The input price index is also up by 0.87 points while the output prices index increases by 1.67 points, the third monthly increase in a row. But while the continued improvement in services PMI is encouraging, there is little to be inferred from the data as the stronger PMIs do not line up well with actual services activity (ISMs).
  • USD: For example, the rising input and output price indices for manufacturing reflect increases in gasoline and other commodities prices. Such modest upside to goods prices may be temporary as supply chain pressures have eased considerably and demand has been shifting away from goods towards services. However, it is less possible to dismiss the output prices index for services that increases for the third month in a row as anecdotes in the report point to firms being able to pass through higher costs from wages and utility bills to consumers.   


Week Ahead: US Employment cost index, core PCE, BOJ April board meeting, German ifo, French and German inflation data, UK remit, Australian Q1 CPI and BoC Minutes, Singapore CPI, Industrial production and China Manufacturing PMI

  • USD: US Q1 Employment Cost Index – Citi: 1.2%, median: 1.1%, prior: 1.0% - Citi Research expect a 1.2%QoQ increase in Q1 ECI, stronger than the 1.0% increase in Q4 and with upside risks. However, there is some risk that revisions to ECI in 2022, if similar to revisions to price inflation in 2022, could imply H1-2022 ECI lower and H2-2022 ECI relatively higher. This might lead the quarter-on-quarter change in Q1-2023 to be somewhat softer.
  • USD: US Q1 GDP Annualized QoQ – Citi: 2.3%, median: 2.0%, prior: 2.6%; Personal Consumption – Citi: 5.0%, median: 4.0%, prior: 1.0%’ Core PCE QoQ – Citi: 4.7%, median: 4.7%, prior: 4.4% - Strong GDP growth in the second half of last year should continue into 2023, with a 2.3% (QoQ SAAR) increase in Q1 real GDP, led by a substantial 5.0% increase in personal consumption. Part of this strength in consumption will likely be due to already-known issues with seasonal adjustment that led to stronger spending in January to start the quarter. Overall,  consumption still remains elevated, with strength led by services consumption but is likely to slow later in the year. Other elements of GDP are likely to be on the softer side, including  investment. Business equipment investment should pullback, consistent with slowing manufacturing activity. Manufacturing should remain soft over the coming quarters and residential investment should still decline in Q1 due to continued declines in single family construction spending. Changes in inventories and net exports should also both weigh on GDP growth in Q1.
  • USD: US March Personal Income – Citi: -0.2%, median: 0.2%, prior: 0.3%; Personal Spending – Citi: 0.0%, median: -0.1%, prior: 0.2%; Core PCE MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; Core PCE YoY – Citi: 4.6%, median: 4.5%, prior: 4.6% - US personal income should fall a modest 0.2%MoM in March as transfer payments fall back towards pre-pandemic levels. Spending should be flat on the month in March although with risks also tilted towards a slight decline. Meanwhile, elements of CPI and PPI imply a 0.32%MoM increase in core PCE inflation in March, with details continuing to point to persistently too-strong underlying inflation. Shelter prices that finally started to slow in March CPI will similarly imply a smaller boost to PCE inflation compared to previous months. However, as these prices slow further, the difference in the contribution of shelter to overall inflation will be much smaller in PCE inflation.
  • USD: US March Durable Goods Orders – Citi: 0.8%, median: 0.7%, prior: -1.0%; Durable Goods Orders ex Trans – Citi: -0.1%, median: -0.2%, prior: -0.1%; Capital Goods Orders Non-defense ex Air – Citi: -0.2%, median: 0.2%, prior: -0.1% - durable goods orders should rise 0.8%MoM with strength largely in a rebound in aircraft orders. Previous strength in aircraft orders should also continue to support shipments of capital goods. While volatile transportation orders (aircraft and motor vehicles) are often looked-through when assessing the underlying trend of investment, manufacturing of transportation goods is still a notable share of overall GDP. Excluding transportation goods, durable goods and core capital goods should remain soft, in line with further easing in manufacturing activity as goods demand generally moves sideways.


  • JPY: The BoJ’s April 27-28 monetary policy meeting will be the first under new Governor Ueda. Some market participants expect YCC to be adjusted or abandoned, but Citi Research expect all aspects of policy including YCC to be maintained as. There are 4 reasons why – (1) scheduled wages for regular employees shown in the Monthly Labor Survey is a significant factor for the macro wage, particularly the base portion. The BoJ would therefore probably like to ascertain the SME wage settlement situation in addition to JTUC headline numbers. While it already seems clear that scheduled wage growth will rise in 2023, the BoJ would like to see more data before assessing the magnitude. (2) At his inaugural press conference, Governor Ueda said the yield curve is being shaped more smoothly than before. He thus took a relatively more sanguine stance. The BoJ may be seeing less urgency for YCC adjustments amid economic uncertainty sparked by the banking turmoil in Europe and the US along with falling interest rates overseas. (3) BoJ FY23 inflation projection set to rise — Citi Research expect FY23 inflation projection for Japan to be raised based on corporate pass-through of import costs - core CPI is likely to be raised to +2.0% YoY from +1.6% as of the January report, and the core- core CPI to +2.2% from +1.8%. The BoJ will also introduce FY25 inflation projections with a number likely to be close to 2%. A 2% projection should not have any immediate policy implications. (4) Citi Research still expect YCC adjustment in June by shortening the target duration from the 10 to 5 or 3Yr maturity at the June meeting. However, adjustment would become more difficult if the credit situation deteriorated sharply in the US or Europe, or if the Lower House was dissolved for a general election in Japan.


  • EUR: ECB Watch – ahead of the 4 May meeting, Citi Research’s base case is for a 25bp rate hike, but confirmation of accelerating growth momentum after the PMIs and a strong Q1 GDP print (Citi expects +0.3% QQ compared to consensus and the ECB at +0.1% QQ) could help tilt the balance to a 50bp hike. The key focus of rate setters will be on the inflation data (national prints late in the week) and bank lending data (2 May); Germany: Ifo Business Climate, April – Citi Forecast 94.2, Consensus 93.3, Prior 93.3; Ifo Expectations, April – Citi Forecast 92.4, Consensus 90.9, Prior 91.2; Ifo Current Assessment, April – Citi Forecast 96.0, Consensus 95.5, Prior 95.4; Euro Area: Economic Sentiment Indicator, April – Citi Forecast 99.7, Consensus 99.0, Prior 99.3; France CPI Inflation, April – Citi Forecast 5.8% YY, Consensus 5.7% YY, Prior 5.7% YY (Food inflation still up); HICP Inflation, April – Citi Forecast 6.7% YY, Consensus 6.7% YY, Prior 6.7% YYY; German CPI Inflation, April – Citi Forecast 7.4% YY, Consensus 7.3% YY, Prior 7.4% YY (Package Holidays in Focus); HICP Inflation, April – Citi Forecast 7.5% YY, Consensus 7.8% YY, Prior 7.6% YY (Methodology change and Easter effect)
  • EUR: Eurogroup meeting: a new Berlin-Brussels divide? – the EU Commission has made proposals to extend bank resolution procedures to smaller banks to protect taxpayers, but state-owned German banks have Berlin on their side for fear around their national deposit insurance scheme. The conflict is one of many between Olaf Scholz’s “traffic light coalition” and its partners, from fiscal rules via economic sovereignty to energy policies. Resolution seems unlikely meaning Banking Union loose ends will likely remain.


  • GBP: UK: Where is the remit landing? – this week sees a lighter week as far as UK data and speakers are concerned. The focus will likely be on the remit as we get the final March public finances data for FY 2023/4. Citi Research expect CGNCR of £28.4bn, rounding out a £114bn figure for the year as a whole.


  • AUD: Australia Q1 CPI: Citi Headline QoQ forecast; 1.4%, Previous; 1.9%; Citi Headline YoY forecast; 7.0%, Previous; 7.8%; Citi Trimmed Mean QoQ forecast; 1.4%, Previous; 1.7%; Citi Trimmed Mean YoY forecast; 6.3%, Previous; 6.9% - Citi Research revise down their estimate of Q1 headline CPI from 1.7% to 1.4% and also marginally shave down their underlying inflation forecast by 0.1pp to 1.4%. This would imply a yearly inflation reading of 7% and 6.3% for headline and underlying inflation, respectively. The team sees some risks to the downside in the headline measure but underlying inflation could still be higher and sticky. Overall, inflation has likely peaked in Australia, but remains elevated. Moreover, some of the sticky items such as rents and services inflation are expected to accelerate over the coming year which is likely to keep the RBA with a firm tightening bias over the coming months, and still flag a risk of rate hikes later in the year.


  • CAD: BoC Summary of Deliberations for April interest rate decision – Citi Research see generally hawkish risks around the tone of the minutes for the BoC’s April decision to hold rates at 4.50%. Governor Macklem has said a number of times that the Governing Council discussed the possibility that rates might rise further at the April meeting. The most informative elements of the minutes could be any indication around the conditions for economic activity and inflation that would warrant another hike. In particular, it would be useful to know how long the Governing Council would wait to see excess demand ease before concluding higher rates would be necessary to weigh on demand further.


  • SGD: Singapore CPI (%YoY) March: Citi Forecast 5.9, Consensus 5.6, Prior 6.3; CPI (NSA, %MoM): Citi Forecast 0.9, Prior 0.6; Core CPI (%YoY): Citi Forecast 5.2, Consensus 5.0, Prior 5.5; Singapore Industrial Production (%YoY) March: Citi Forecast -5.9, Prior -8.9; Industrial Production (SA, %MoM): Citi Forecast 8.2, Prior -11.7


  • CNY: China Manufacturing PMI April: Citi Forecast 51.4, Prior 51.9 – Citi Research expect manufacturing PMI to dip following its usual seasonal patterns in April. April could be a month of normalization after the initial return to work rush in March. Improvement in operation rates for asphalt plants and cement mills is both less impressive. With reopening deepening, Citi Research continue to see services, instead of manufacturing, as the source for growth support or surprise in the coming months.


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