Tuesday, July 3, 2012

June PMIs disappointing

It’s been a poor trot of PMI data for the June month with ongoing debt (and political) issues and recession in Europe impacting many other countries export orders in particular.

In the US the PMI dropped from 53.5 in May to 49.7 in June with new orders declining from 60.1 to 47.8.  Mind you, we thought the 60.1 in May was a bit “toppy” given our view that GDP growth is running at around a 2% annual pace, but we didn’t expect a decline of this magnitude.  The export index fell from 53.5 to 47.5 over the month.
This result doesn’t change our view that the US economy will continue to grow at a modest pace, although it supports our expectation that June quarter US GDP will come in weaker than March quarters tepid 1.9% annualised pace.  The prices paid index dropped from 47.5 to 37.0 which is good news for (headline) inflation and those who think another round of quantitative easing will make a difference.  We also like the decline in the inventories index to 44.0 from 46.0.  We would be more concerned if orders were weak and inventories were rising, although that pattern is still a risk.

In China the official PMI index dropped further from 50.4 to 50.2.  That was actually better than the market was expecting and importantly represents a slowing in the rate of decline: a turning point would be better, however!  The good news is that China has room to ease monetary and fiscal policy further: we expect further cuts to bank reserve ratio requirements and interest rates in the period ahead.  It’s also the case that it’s too early to expect any sign in the data of the easing measures that have already been taken. The services sector is performing better with the index for that sector just released at 56.7 for June up from 55.2 in May.

In Europe itself the PMI posted a second consecutive month at 45.1, indicating the economy remains in recession and that we will most likely see a further contraction in GDP in the June quarter.  Later this week the focus of attention turns to the ECB and the likelihood of a cut in the benchmark interest rate, reflecting the weakened growth outlook and perhaps a reward for the politician’s good efforts last week.

The key question right now is the extent to which the drop in new orders and the PMIs generally represents a genuine slowing of demand or Europe-related confidence factors.  We expect it’s both but the extent to which it is the latter, we should see some improvement in the months ahead given the positive reaction to the outcome of last week’s EU Summit.