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UK September final manufacturing PMI 54.1 vs 54.3 prelim

  
Analysis, Economy

Latest data released by Markit – 1 October 2020

The preliminary report can be found here. Little change compared to the initial estimate, as factory activity expands for a fourth straight month but at a slower pace.

The good news is that output and new orders are still seen growing but the uncertainty surrounding the latest virus disruptions, stimulus measures ending, and Brexit could well weigh on the outlook moving forward. Markit notes that:

“September saw UK manufacturing continue its recovery from the steep COVID-19 induced downturn. Although rates of expansion in output and new orders lost some of the bounce experienced in August, they remained solid and above the survey’s long-run averages. Export demand is also picking up, as economies across the world restart operations and adjust to COVID-19 restrictions. Business sentiment remained positive as a result, with three-fifths of UK manufacturers forecasting a rise in output over the coming year.

“While the sector is still making positive strides, keep in mind that there remain considerable challenges ahead. This is especially true for the labour market, which saw further job losses and redundancies in September. The full economic cost incurred by 2020 will likely rise further as governments look to re-introduce some restrictions, job support schemes are tapered and rising numbers of firms start focussing on Brexit as a further cause of uncertainty and disruption during the remainder of the year.”

Eurozone September final manufacturing PMI 53.7 vs 53.7 prelim

  
Analysis, Economy

Latest data released by Markit – 1 October 2020

The preliminary report can be found here. No change to the initial estimate as this reaffirms a modest pickup in euro area factory activity last month, despite concerns surrounding the virus situation in the region.
That said, all this does is confirm a two-paced recovery towards the end of Q3 with the services sector expected to lag further amid the resurgence in virus cases – which we already saw with the preliminary reports (link above).
Markit notes that:

“The eurozone’s manufacturing recovery gained further momentum in September, rounding off the largest quarterly rise in production since the opening months of 2018. Order book growth and exports also accelerated, indicating a welcome strengthening of demand. Job losses consequently eased as firms grew more upbeat about prospects for the year ahead, with optimism returning to the highs seen before the trade war escalation in early 2018.

“The recovery would have been far more modest without Germany, however, where output has surged especially sharply to account for around half of the region’s overall expansion in September. Germany’s performance contrasted markedly with modest production growth in Spain, slowdowns in Italy and Austria, plus a particularly worrying return to contraction in Ireland. Excluding Germany, output growth would have weakened to the lowest since June.

“Divergent export performance explains much of the difference between national production trends, with Germany the stand-out leader in terms of growth in September, led by a strengthening of demand for investment goods such as plant and machinery.

“Encouragingly, optimism about the future rose not only in Germany but also in France, Italy, Spain and Austria, hinting that the upturn could broaden out in coming months. Without a more broad-based recovery, the sustainability of the upturn looks at risk, with additional worries fuelled by rising Covid19 infection rates.“

Bank of Japan Tankan report for Q3, large manufacturers sentiment -27 (-24 expected)

  
Analysis, Economy

BOJ quarterly report

  • big manufacturers index -27 (Reuters poll: -23, prior was -34)
  • big manufacturers index three months ahead seen at -17 (Reuters poll: -17)
  • big non-manufacturers index -12 (Reuters poll: -9, prior -17)
  • big non-manufacturers index three months ahead seen at -11 (Reuters poll: -9)
  • small manufacturers index -44 ( -38)
  • small manufacturers index three months ahead seen at -38 ( -34)
  • small non-manufacturers index -22 ( -21)
  • small non-manufacturers index three months ahead seen at -27 (: -21)

 

 

  • all firms employment index -6
  • big manufacturers’ production capacity index +15 vs June Q +15
  •  big manufacturers see fy2020/21 recurring profits -24.6 pct
  • big manufacturers see dollar averaging 107.34 yen for FY2020/21
  • big firms see fy2020/21 capex +1.4 pct (Reuters poll: +1.3)
  • small firms see fy2020/21 capex -16.1 pct ( -15.1)
  • September Q all firms financial condition index +5 vs June +3

 

This is painting a very poor picture. A couple of perhaps more encouraging signs are that the large manufacturing index has improved for the first time in … 11 quarters (nearly 3 years).

Non-manufacturing index improved for the first time in 5 quarters.

—

 

The Bank of Japan Tankan reports on a survey of manufacturing and service companies designed to assess business conditions in Japan

UK September flash services PMI 55.1 vs 55.9 expected

  
Analysis, Economy

Latest data released by Markit/CIPS – 23 September 2020

  • Prior 58.8
  • Manufacturing PMI 54.3 vs 54.0 expected
  • Prior 55.2
  • Composite PMI 55.7 vs 56.1 expected
  • Prior 59.1

The recovery in the UK economy begins to lose steam, with household demand seen weakening towards the end of Q3. Business activity continues to grow at a modest pace but the data here mainly reflects the past as the focus stays more on the virus situation now.

The market is looking more towards what restrictions will be introduced by the government to curb the spread of the virus and that is what matters more for the pound at this stage.
Inevitably, if the virus situation worsens, that will also be reflected in business activity data as seen above as well. Markit notes that:

“The UK economy lost some of its bounce in September, as the initial rebound from Covid-19 lockdowns showed signs of fading.

“It was not surprising to see that the slowdown was especially acute in services, where the restaurant sector in particular saw demand fall sharply as the Eat Out to Help Out scheme was withdrawn. Demand for other consumer-facing services also stalled as companies struggled amid new measures introduced to fight rising infection rates and consumers often remained reluctant to spend.

“Encouragingly, robust growth in manufacturing, business services and financial services has offset weakness in consumer-facing sectors, meaning the overall rate of expansion remained comfortably above the survey’s long-run average, which adds to expectations that the third quarter will see a solid rebound in GDP from the collapse seen in the second quarter.

“However, jobs continued to be cut at a fierce rate in September as firms sought to bring costs down amid weak demand, meaning unemployment is likely to soon start rising sharply from the current rate of 4.1%. The indication from the survey that growth momentum is quickly lost when policy support is withdrawn underscores our concern over the path of the labour market once the furlough scheme ends next month, and raises fears that growth could fade further as we head into the winter months, especially as lockdown measures are tightened further.” 

China has recovered but it’s the wrong kind of recovery

  
Analysis, Economy

Industrial production is driving the rebound

Industrial production is driving the rebound
China is an interesting counter-point to many ideas about the global economy right now. It’s essentially a COVID-free country and an entirely open economy.
From a distance, it’s recovered in a big way.
But when you drill down, it’s not quite as strong as it seems. Retail sales are down 8.6% y/y in the first 8 months of the year and were just 0.5% y/y in August.
It’s not the consumer driving the recovery.
Contrast that with:
  • Industrial production +5.6%
  • Fixed asset investment +4.16%
  • Trade surplus +19.3%
That’s not a sustainable recovery and it’s not the consumer-led economy that China’s been trying to build for the past 5 years.
China has gone back to the old playbook to stimulate growth. Perhaps that was the right thing to do but the slow consumer recovery even in a COVID-free country is worrisome.
It also sets up domestic problems for China down the road, as the FT highlights today:

China’s “recovery”, in other words, is largely an exacerbation of the problems that have long been recognised by Beijing. It is a supply-side recovery in an economy that urgently needs more domestic demand but that has found it politically very hard to manage the wealth transfers that it requires.

This recovery isn’t sustainable without a substantial transformation of the economy, and unless Beijing moves quickly to redistribute domestic income, it will require either slower growth abroad or an eventual reversal of domestic growth once Chinese debt can no longer rise fast enough to hide the domestic demand problem

OK, so ‘Suganomics’ is now a thing. Analyst says it means lower USD/JPY for longer.

  
Analysis, Economy

New Japanese Prime Minister Yoshihide Suga has inherited Abenomics but its apparently being renmaed out there.

In early comments Suga has stressed deregulation will play a bigger role though. Let’s see how he goes with that ….
Analysis from SMBC Nikki in Tokyo suggest that the initial impact of economic deregulation will be deflationary and so push up the real interest rates in the short term. Thus will be a supportive factor for the yen and keep it under 105.
Huh. It may mean less yen heading offshore from Japan but I can’t see it necessarily prompts inflows to the country. Not buying that ‘stays below 105’ argument sorry.
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