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Is global growth starting to respond to tighter financial conditions?

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USD: US Markit PMIs point to deteriorating economic conditions – the headline (flash) Markit PMI Composite falls to 51.2 in June from 53.6 in May. The decline signals further easing in the rate of expansion in US business activity to a pace notably slower than March’s recent peak. In terms of the breakdown, Service PMI is down to 51.6 in June from 53.4 in May while the Manufacturing PMI index drops to 52.4 in June from 57.0 in May. Although service providers continue to indicate a rise in output, the manufacturing index sees its weakest increase for five months with factory production slipping into outright decline and likely signaling a sharply slower pace of US economic growth in June. Furthermore, it seems that the deteriorating forward-looking indicators are setting the scene for a possible US economic contraction in Q3’2022. According to S&P Global, the survey data are consistent with the US economy expanding at an annualized rate of less than 1% in June, with the goods-producing sector already in decline and the vast services sector slowing sharply.
 
Euro zone PMIs also react
EUR: The euro area June (flash) manufacturing PMI drops -2.6 pts MM to 52 (consensus: 53.8), the fifth consecutive decline with the output component in outright contraction below 50, for the first time in 2 years. New orders also fall below 50 for two consecutive months, with June seeing the sharpest decline since May 2020. The June (flash) services output PMI also drops -3.5 pts MM to 52.8 (consensus: 55.5), the second consecutive decline with companies blaming the rising cost of living and fading pandemic pent-up demand. This leaves the euro area June (flash) composite output PMI down -3.0 pts MM to 51.9 (consensus: 53.8), the lowest since Feb 2021.
 
EUR: It seems that the weak PMIs across the board appear to be finally catching up with the  weakness in euro zone consumer sentiment and in some business expectation surveys (eg Ifo). Manufacturing appears to be clearly underperforming here to reflect softer demand and still-disruptive supply bottlenecks and manufacturing new orders below 50 for the second month suggests further weakness in output ahead. Meanwhile, re-opening effects, which has boosted services activity in recent months, appear to be fading as the spike in cost of living crisis bites. At these levels the composite PMI is not yet consistent with a decline in euro area QQ GDP but the size of the drop in June is worrying in this respect and likely a prelude to further weakness in the coming months. The price sub-components also suggest euro area price pressures may have peaked input cost inflation eases slightly, down for a third successive month, though still the fourth-highest recorded since comparable data were first available in 1998. 
 
yoEUR: In Germany and France, the clear weakening in the flash composite June PMI (2.4 points to 51.3 in Germany and 4.2 points to 52.8 in France), combined with a continued scaling back of firms’ business expectations for output over the next 12 months, is a warning sign of growing recession risk in H2’2022. The cost of living crisis is unlikely to fade before inflation rates peak sometime in autumn. At the same time, the banking system is expected to gradually tighten lending standards while demand and hiring expectations are likely to be revised down during the summer, converging towards the already much lower level of household sentiment. The current environment is therefore not conducive to an improvement in the euro rea economic situation, even if the suspension of European fiscal rules extends to 2023 and the ECB comes up with a new anti-fragmentation tool to ensure an adequate transmission of its still accommodative monetary policy stance. What’s more, there’s an additional left-tail risk for the euro area in the form of a complete shut-off from Russian gas supply.

 

Unlike EZ, UK services PMI delivers an upside surprise and cements August rate hike

GBP: Unlike the euro zone flash June PMIs, the (flash) UK June PMIs prove unexpectedly resilient, with composite output steady at 53.1, above consensus for 52.4, led by a steady UK (flash) services PMI at 53.4 (Citi 52.0, Consensus 52.9), largely attributed to Covid normalization and early summer spending providing some narrow near-term support. But the UK (flash) June manufacturing PMI comes in weaker at 53.4 (Citi 54.5, Consensus 53.6) with supply issues weighing heavily as the output index falls to 51.2. Elsewhere, new order volumes across the UK private sector as a whole drop from 53.8 in May to 50.8, softening for the fourth successive month and closing in on the 50 neutral level. The business expectations index also falls by 4.6 points, the largest monthly decline since the start of the pandemic. These data tend to have relatively robust leading characteristics and suggest that the window for additional BoE rate hikes might be closing after the summer. 
 
GBP: But employment and price growth still not softening quickly - job creation unexpectedly accelerates in June despite softening demand and while pass through of input costs is beginning to moderate (with output price inflation falling more quickly than input cost inflation), both indices remain relatively robust. The  data may re-affirm hawkish concerns on the BoE MPC committee about second round inflationary effects which leaves the door firmly open to a sixth successive increase in Bank Rate, probably worth 25bp to 1.5% at the August 4th meeting. Overall however, the data indicates economic slowing ahead given the collapse in optimism with resilience predicated on an increasingly narrow base.
 

Data due today – Japan CPI

JPY: Japan Nationwide Consumer Prices, Overall (May): Citi Forecast 2.3% YoY, Previous: 2.5% YoY; Excluding Fresh Food: Citi Forecast: 2.0% YoY, Previous: 2.1% YoY; Excluding Fresh Food and Energy: Citi Forecast: 0.7% YoY, Previous: 0.8% YoY – Citi analysts expect nationwide core CPI (excluding only fresh food) to rise 2.0% YoY in May, down from a 2.1% YoY but advance from April as energy’s boost moderates. The team expects core CPI excluding special factors to rise 1.15% YoY in May as in April and overall CPI to increase by 2.3% YoY in May (+2.5% YoY in April), while CPI excluding fresh food and energy likely gains 0.7% YoY (+0.8% YoY). Citi analysts estimate core CPI inflation will remain elevated at or over 2% YoY for the rest of the year.