PMIs expected to reaffirm two-speed economy

OVERNIGHT

Asian equity markets have continued to fall, posting the first weekly decline in four weeks, with the broad risk off tone providing support for the US dollar and leading to lower Treasury yields. Oil prices are also lower. Japan’s headline CPI was in line with expectations, falling to 3.2% in May from 3.5% in April, although the core measure (excluding fresh food) declined a tad less than predicted to 3.2% (consensus: 3.1%) from 3.4%.

THE DAY AHEAD

UK data earlier today showed signs of economic resilience despite high inflation and rising interest rates. The GfK consumer confidence index increased by more than expected to -24 in June from -27 in May, its highest level since January 2022. The survey was conducted before yesterday’s decision by the Bank of England to increase interest rates by 50bps to 5.0%. Separately, official data revealed a second consecutive monthly rise in retail sales in May. The overall volume of sales (including fuel) rose by 0.3% following the 0.5% gain in April. The increase was driven by the warm weather which supported online sales of outdoor goods and clothes. Fuel sales were also supported by lower prices. 

This morning’s flash PMI reports will be closely watched for an early indication of economic activity and price trends in June, particularly for the UK and the Eurozone. The survey has recently painted a picture of a two-speed economy with manufacturing output weighed down by weak demand despite easing supply bottlenecks. Services activity, on the other hand, has been boosted by stronger consumption reflecting firmer labour markets and a shift in spending away from goods. 

Overall, we forecast a rise in the UK manufacturing PMI to 48.1 from 47.1, still below the 50 no-growth threshold, while services remains in expansion territory increasing to 55.6 from 55.2. For the Eurozone, we forecast manufacturing and services PMIs to edge down to 44.3 and 54.0, respectively. These outturns are consistent with stronger UK and Eurozone GDP growth performances in Q2.

The equivalent S&P Global US flash PMIs will also be released today, although they tend to receive less attention than their European counterparts. Similar to Europe, we expect the manufacturing index to remain below the 50 level at 48.5, while services PMI is seen at 54.5, slightly below May’s 54.9.

MARKETS

The pound’s performance was mixed yesterday despite the Bank of England’s decision to raise interest rates by 50bps rather than 25bps and may reflect markets’ assessment of policy tightening on the economic outlook. GBP/USD has fallen further overnight on broader dollar strength to near 1.27. Two-year gilt yields rose further, closing up 3bp at 5.08%, but yields further out on the curve fell.