Traders seem very happy to watch and wait for Thursday’s fireworks it seems with price action particularly quiet yesterday. Eurozone manufacturing PMIs further increased the belief that something needs to be done by the European Central Bank; of course, nobody can quite agree on what needs to be done. Germany’s PMI fell to a 7 month low in May, with weakness seen as a result of a strong euro hurting exporters alongside Ukrainian fears and the late Easter. France’s manufacturing sector contracted once again and fell to a 4 month low while Italy fell to a 2 month low.
Price pressures within the indices were not particularly extreme with most countries’ manufacturing sectors reporting ‘marginal’ softening in inflation. At the current levels however, marginal is all the averages need to be pushed into freshly poor territory.
Germany’s preliminary HICP reading for May disappointed, falling to a 4 year low of 0.6% compared to 1.1% in April, with deflation of 0.3% on the month alone. If this isn’t a flag for the throwing of a kitchen sink at the European economy then I don’t know what is. The Eurozone-wide HICP measure is due at 10am and we would think that this German slip must push expectations below the 0.6% consensus. Of course, we must take into account core CPI as the ECB has been persistent in its attempts to validate its current policy outlook by emphasising the negative effects of food and energy inflation on the overall price basket.
Yesterday’s UK PMI showed continued growth with a reading of 57.0, right on expectations. There is a danger that the continual good news from the UK economy becomes mundane but we are always happy to celebrate growth; the UK manufacturing sector has now expanded every month since March of last year. Once again the story remains the same as stronger hopes and expectations around the recovery engendered strong growth in output and new orders. For the 13th month in a row we have seen employment increase as well allowing backlogs to be reduced across the sector, and export orders were strong globally, including areas – such as Europe – where aggregate demand has become an issue.
This number continues our assessment that the 1.3% growth in manufacturing and industrial production in Q1 was ably looked after heading into Q2, and increases the chances of a figure north of 1% for Q2 GDP.
There is not enough time to fully explain the awesome strangeness of what happened with the US’s ISM number in the afternoon. Originally the Institute for Supply Management reported that it’s PMI for the US manufacturing sector came in at 53.2 in May, down from 54.9 in April; a miss against expectations. This was definitely an unwelcome surprise as it showed jobs growth slowing and the inventories – a facet of the US economy that is expected to have a strong Q2 – remaining very poor.
The fears were that the weather-related bounce had taken place in April and was now over. This figure was then revised twice by the ISM as it became clear that a computer error had entered incorrect seasonal data. The true number hit expectations of 55.4 and increases belief that the US economy should accelerate from here. The non-manufacturing number is due tomorrow.
Overnight, the Reserve Bank of Australia has completed its latest monetary policy meeting and kept rates on hold at 3.25%. The rhetoric against the strong AUD increased within the accompanying statement with the RBA stating that “the earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices”. The AUD has ignored this however, possibly expecting stronger language, and is slightly higher on the session.
Away from those Eurozone HICP and unemployment readings at 10.00 BST, we have the UK’s construction PMI release which is expected to stay at exceptional levels. We have seen this morning that, according to the Nationwide Building Society, house prices rose 11.1% nationally in the year to May. The figure is due at 09.30.
