PMI Friday

By Philip Marey Senior US Strategist

The 10 year US treasury yield climbed above 3.70% yesterday, while the 2 year reached 4.15%. Not only does this reflect expectations of further policy rate hikes, but the deep inversion is also a harbinger of a US recession, an official one this time approved by the NBER, which we expect in the second half of 2023. Don’t forget the US economy is still struggling to come out of a technical recession, with the Atlanta Fed’s GDPNow-cast for Q3 just at 0.3%. Meanwhile, with only a few exceptions, central banks around the world are trying to keep up with the Fed.

Yesterday, the Bank of England raised the bank rate by 50 bps to 2.25%. The decision was not unanimous: it was 5-4. Three (Haskel, Mann, Ramsden) voted for a 75 bps hike, one (Dhingra) for 25 bps. The BoE also voted (unanimously) to begin active gilt sales from October 3, at a pace of £10bn a quarter, as planned. The split rate decision reflects a very uncertain economic outlook. The government’s Energy Price Guarantee leads to a lower peak of headline inflation, but the (net) improvement in the demand outlook is expected to add to medium term inflationary pressures. The central bank continued its pledge to “respond forcefully, as necessary” to these pressures, which are going to be re-examined in more detail once the details of the government’s Growth Plan are fully clear. The Chancellor will announce his (not-so) mini-budget today. Strong fiscal easing opens the door to a 75 bps increase in November, especially if the market believes the government borrows too much. In our view, however, the uncertain growth and inflation outlook continues to favour a more gradual rather than a frontloaded approach. For more details, we refer to Stefan Koopman’s BoE post-meeting analysis.

US jobless claims rose to 213K in the week ending on September 17 from 208K (revised). However, this is still below the levels seen in July and August. This suggests that labor demand remains resilient despite weak GDP growth. Meanwhile, continuing claims dropped to 1379K in the week ending on September 10 from 1401K (revised). Continuing claims also saw a rise in July and August, but have fallen again in recent weeks. This could be a sign that unemployment is falling back. So the US labor market remains tight.

Day ahead

Today, S&P Global is publishing a series of PMI reports for September. This morning the French PMIs showed a diverging pattern, with manufacturing dropping below the neutral level from 50.6 to 47.8, while the services PMI strengthened from 51.2 to 53.0. As a result, the composite French PMI improved from 50.4 to 51.2. S&P Global provided more color: “According to surveyed firms in the service sector, the sole driver of the latest expansion, greater intakes of new business supported growth. However, this was a stark contrast to the trend in the manufacturing sector where output levels fell at the sharpest rate since May 2020, marking a deeper downturn across French factories. Some businesses with exposure to automotive- and energy-related industries attributed lower output to weak demand from their clients.”

The German PMIs were very clear with both the manufacturing (from 49.1 to 48.3) and the services sector (from 47.7 to 45.4) falling deeper into contractionary territory. According to S&P Global: “The deterioration owed to a steep and accelerated decline in service sector activity that was the quickest for 28 months. Manufacturing production was meanwhile down for the fourth month in a row, though the rate of contraction eased to the slowest since June amid some reports of improved raw material supply.” The Eurozone and UK PMIs will also follow this morning.

Later today, we get S&P Global’s PMI for the US. In August, the US PMIs were disappointing. The services PMI headed deeper into contractionary territory and the manufacturing PMI indicated a slowdown, although still positive growth. For September, the Bloomberg consensus sees a rebound for the services sector to 45.5 from 43.7. However, this would still be in contractionary territory. After peaking this year at 58.0 in March, the services PMI rapidly declined and dropped below the neutral level of 50 in July. In contrast, expectations are for a further slowdown in the manufacturing sector to 51.0 from 51.5. The manufacturing PMI peaked this year at 59.2 in April, but has declined in each month since then, getting closer to the neutral level of 50. For the composite PMI, a rebound to 46.1 from 44.6 is expected. After peaking this year at 57.7 in March, the composite was dragged below neutral in July. According to S&P Global last month, “US private sector firms signalled a sharper fall in business activity during August. The decrease in output was the fastest seen since May 2020. The rate of contraction also outpaced anything recorded outside of the initial pandemic outbreak since the series began nearly 13-years ago.” The expectations for the S&P Global PMIs reflect the view that the US economy has a lot of trouble coming out of the technical recession of the first half of the year, with the services sector still failing to find positive growth, while manufacturing is slowing down. This explains why the Atlanta Fed’s GDPNow-cast for Q3 stands at only 0.3% (as of September 20), barely in positive territory.