The headline reading is a 22-month low but the more standout detail is that manufacturing output actually contracted for the first time since the early days of the pandemic and lockdowns in Europe. This pretty much provides a comprehensive overview of what is happening across the region as industrial activity is hit by rising prices:
The fear now is that a recession may be looming towards the latter stages of the year. S&P Global notes that:
“Eurozone manufacturing has moved into decline in June, with production dropping for the first time for two years amid a steepening downturn in demand. Orders for goods have fallen at an accelerating rate over the past two months, dropping in June in every country surveyed with the exception of the Netherlands, and even here the rate of growth has weakened markedly in recent months.
“Demand is now weakening as firms report customers to be growing more cautious in relation to spending due to rising prices and the uncertain economic outlook.
“The downturn looks set to gain momentum in coming months. Inventories of both raw materials and unsold stock are rising due to lower than expected production and sales volumes respectively, hinting that an inventory correction will act as an additional drag on the sector in coming months. Backlogs of work are meanwhile falling, which is often a prelude to firms reducing operating capacity, and business confidence in the outlook has fallen to the gloomiest for just over two years.
“Supply for many important inputs also remains constrained, and concerns over energy and food supply have added to nervousness about the future.
“One upside to the recent weakening of demand is an alleviation of some supply chain constraints, which has in turn helped cool inflation pressures for industrial goods. With the survey data indicating an increasing likelihood of the manufacturing sector slipping into a recession, these price pressures should ease further in the third quarter.”
Elsewhere, the dollar is steady after a bit of a drop yesterday against the euro and pound although it did keep a decent advance against the commodity currencies. The aussie is the laggard again today with AUD/USD down 0.5% to 0.6890 amid the dwindling risk appetite.
Looking ahead, euro area PMI data will offer something to chew on in the session ahead. We’ll see how resilient the economy is in the wake of more persistent inflation and if recession worries by year-end are becoming more justified.
0645 GMT – France June business confidence 0715 GMT – France June flash manufacturing, services, composite PMI 0730 GMT – Germany June flash manufacturing, services, composite PMI 0800 GMT – Eurozone June flash manufacturing, services, composite PMI 0830 GMT – UK June flash manufacturing, services, composite PMI 1000 GMT – UK June CBI retailing reported sales
That’s all for the session ahead. I wish you all the best of days to come and good luck with your trading! Stay safe out there.
The latest Reuters poll has 67 of 91 analysts polled forecasting a 75-basis-point Federal Reserve rate hike in July.
would take the fed funds rate to a range of 2.25%-2.50%, which is around a ‘neutral’ level
The Reuters report goes on:
A strong majority expect the central bank to hike its policy rate by another 50 basis points in September,
with opinion more split on whether it will hike by 25 or 50 basis points in November.
A majority expect the Fed to raise rates by 25 basis points at its December meeting.
That would take the fed funds rate to a range of 3.25%-3.50% by the end of this year, 75 basis points higher than thought in a poll published just two weeks ago.
“Since the Fed is still underestimating the inflation problem … not recognizing that a wage-price spiral has already started, we expect they will have to raise rates faster than they now expect,” Philip Marey, senior U.S. strategist at Rabobank, wrote in a note. “Unfortunately, the hiking path is also likely to be followed by a recession.”
Reuters reports on remarks from Heather Boushey, a member of President Joe Biden’s Council of Economic Advisers, on Tuesday at an event hosted by the Washington Post.
Asked about Biden’s recent comment that a recession was not inevitable, Boushey said she agreed, adding strong family balance sheets, the low unemployment rate and the economy’s ability to weather the COVID-19 pandemic and other “storms,” without elaborating on specific data.
“That gives us some confidence that should oil prices continue to be high or maybe go up, which would be horrible, … there’s enough of wiggle room that businesses and families will be able to make it through because they have resources to fall back on,”
Sheesh. This does not sound too convincing and I suspect she is just going through the motions. Other members of Biden’s administration are talking the economy up also. For example:
There is no firmly scheduled time for the BOj statement. It is reasonable to expect it in the 0230 to 0330 GMT time slot.
traders are on edge awaiting similar from the Bank of Japan. The SNB is an example of NEVER ruling anything out in markets (and watch out for overconfidence in making predictions). Having said that I’d be urging you not to hold your breath waiting for a 50bp rate hike from the Bank of Japan.
All of the above I have posted earlier. Adding in a couple of snippets now:
The Bank of Japan June meeting is expected to come and go with no change to short or long-term rate targets but dislocation in JGB markets, ramped-up efforts to defend the yield curve target and increasing commentary on the weaker yen make it a more interesting meeting than usual.
The BoJ is facing a weaker yen and headline inflation above its 2% target for the first time in 7 years, but the rise is driven by fuel and food, and policymakers have signalled they are waiting for wage gains sufficient to sustain at target inflation.
We expect the BoJ to maintain its main monetary policy.
Going forward, our main scenario is for the USD/JPY rate to stop exceeding 130 yen and for the core CPI to continue to be greater than 2.5% YoY. Therefore, we expect the BoJ to maintain its current policies – at least under Governor Kuroda.