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US, euro area and UK PMIs all point to slower activity/ stronger inflationary pressures due to supply constraints

US, euro area and UK PMIs all point to slower activity/ stronger inflationary pressures due to supply constraints                                                  

  • USD: US July PMIs - supply chains stretched as PMI’s remain in expansionary territory – the preliminary US July services PMI business activity index comes in weaker than expected at 59.8 vs consensus for 64.5 and lower than June’s reading at 64.6. Both input and output price indices pull back but remain close to record highs, indicative of strong inflationary pressure while the employment index decreases slightly. Meanwhile, the July preliminary manufacturing PMI hits a new record high of 63.1, a modest rise from 62.1 in June with the employment sub-index bouncing up, new orders rising strongly but the output sub-index rather flat. Significantly, the input price index continues to climb and now sits at the 86.4 high-water mark, compared to a then-record 83.7 level in June while output prices see a more modest rise to 72.8 (still a new record high) from 70.9 the previous month. The US PMI readings are clearly indicative of supply-side constraints, especially manufacturing. With output prices firmly in expansionary territory, costs from inputs and supplier wait times are likely to continue appearing in consumer inflation for months to come. Unlike manufacturing, the price indices in services do not rise further but remain just below their record highs set in June, highlighting  inflationary pressures in services also remain fairly robust. Bottom Line - supply-side constraints remain elevated while manufacturing and services are expanding. This suggests perhaps slower growth/ higher inflation ahead as supply issues take longer to work out.       

  • EUR: Euro area flash PMIs up again in July driven by services - the euro area July flash composite PMI is up from the 15-year high of 59.5 in June by 1.1pt to 60.6 (Mkt. 60.0, Citi 58.5) with the manufacturing PMI component down 0.8pt to 62.6 (Mkt. 62.5, Citi 63.5) but the services PMI component up 2.1pt to 60.4 (Mkt. 59.3, Citi 56.5). The gain points to a continued acceleration in the pace of euro area economic activity at the start of 3Q-21. Yet, Citi analysts also point to signs of moderation in confidence and worry about rising tensions in the manufacturing sector in terms of lengthening delivery times and growing supply constraints, while the resurgence of the new Covid-19 cases likely impacts activity in services. 

  • GBP: UK July PMIs signal loss of momentum - UK services PMI disappoints in July falling to 57.8 (Citi 61.9, Consensus 62.0), the weakest rate of growth since March. UK manufacturing PMI also disappoints, falling to 60.4 (Citi 62.8, Consensus 62.4). 32% of firms report growing rates of business activity, while 16% report a fall - reductions are linked primarily to supply shortages, including raw materials and the impact of Covid-19 self-isolation on staff availability. However, there are also signs weak demand - new order growth falls back, with new work the weakest in five months. On prices, services cost burdens grow at the fastest rate in the survey’s history, with tight labor markets and higher wages driving continued increases. Employment growth does however, begin to ease back. Overall, optimism, while still elevated, falls back now to its lowest level since October 2020.               

 

Week Ahead                                

  • USD: FOMC meeting – will the Fed deliver a formal set of “normalization principles” to taper?  Citi analysts expect the Fed to discuss and make substantial decisions around the pace and composition of tapering $80bln/month Treasury and $40bln/month MBS purchases. The team would not be surprised to see a formal set of “normalization principles” released by the Fed or for Chair Powell to give some details around the taper decision even if a decision on the timing of tapering asset purchases will not be made at this meeting. Citi analysts’ base case remains for the Fed to announce tapering in September, to begin the process in December and taper at a pace of $10bln/month Treasuries and $5bln/month MBS. Delta variant concerns however, may result in a slight dovish tweak to the statement though this is not the Citi analysts’ base case. 
  • USD: US Personal Income – Citi: 0.1%, median: -0.5%, prior: -2.0%; Personal Spending – Citi: 0.6%, median: 0.6%, prior: 0.0%; Core PCE MoM – Citi: 0.4%, median: 0.6%, prior: 0.5%; Core PCE YoY – Citi: 3.4%, median: 3.7%, prior: 3.4% - US personal income should remain close to unchanged in June, rising a modest 0.1%MoM while spending should rise 0.6%MoM. Citi analysts also expect a solid, but more moderate 0.4% increase in core PCE inflation in June that should keep the Y/Y reading at 3.4%. Base effects in core PCE are somewhat unfavorable throughout the next few months, although Y/Y core PCE is still likely to remain above 3%YoY through year-end. 

  • EUR: Euro area HICP Inflation, July Flash: Forecast 2.0% YY, prior 1.9% YY - the sizable increase in electricity and gas prices, as a result of dearer energy commodity prices and higher CO2 prices feeding through into utility bills, will cause euro area headline inflation to edge higher again in July. Base effects in food HICP will also add to the change in the YY rate. Core HICP inflation on the other hand, will likely drop sharply and Citi analysts see core HICP dropping from 0.9% YY to 0.4% YY in July, before bouncing back above 1% from August onwards.  

  • EUR: German ifo Business Climate, July: Forecast: 103.0, Prior: 101.8; ifo Expectations, July: Forecast: 105.0, Prior: 104.0; ifo Current Assessment, July: Forecast: 101.0, Prior: 99.6 - the only time since re-unification in 1990 that expectations were higher than now was in 2010. However, Citi analysts expect the current assessment component to climb above 100. Again, focus will be on signs of bottlenecks and price pressures.  

  • AUD: Supply chain issues, strong domestic demand and global commodity prices still imply a relatively firm headline Australian Q2 CPI print this week of 0.8% QoQ, taking the yearly reading to 3.9%. But Citi analysts’ underlying CPI assumption of 0.6% QoQ would take yearly growth to 1.7%, still below RBA’s 2%-3% target band.  

  • CAD: Canada CPI NSA MoM (Jun) – Citi: 0.4%, median: 0.4%, prior: 0.5%; CPI YoY – Citi: 3.2%, median: 3.2%, prior: 3.6% - the most important aspect of the monthly CPI releases will be core inflation measures with a slight risk of a pullback in the core measures as an unusually strong reading from June 2020 drops out of the 12-month calculation. However, recent monthly inflation prints have also been abnormally strong and should keep core inflation measures at-or-above target for some time, even with the change in CPI weights.

  • CNH: China Manufacturing PMI July: Citi 50.6, Consensus 51.0, Previous 50.9 – Citi analysts expect manufacturing PMI to soften modestly to 50.6 in July. Blast furnace operating rates by steel mills dropped sharply around the CCP’s July 1 celebration. Shortage of chips and electricity may also curb production while the Emerging Industries PMI indicates a weakness in demand. As a result, momentum for price may have passed its peak.  

 

This is an extract from the Daily Currency Update, dated July 26, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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