Morning comment: May survival, UK GDP & China CPI

Chris Scicluna
Mantas Vanagas

After Wall Street yesterday ran with the positive lead provided by Asian markets – especially the rally in China – with the S&P500 advancing 0.9% and the 10-year Treasury yield rising 4bps to 2.87%, the tone in Asia today was somewhat mixed. In China, where the latest inflation data broadly met expectations (see below), equity markets failed to gain significant traction (the CSI300 is up about 0.25%). In Japan, despite a further depreciation of the yen through ¥111/$, many initial gains were eventually given up, although the Topix still closed up a further 0.7%, thus now having erased the majority of last week’s decline. Elsewhere, the Turkish lira bounced back more than 1% against the dollar having earlier plummeted in response to President Erdogan’s move to name his son-in-law as head of the new Ministry of Treasury and Finance and give himself powers to appoint the Central Bank Governor. And with Theresa May now looking safe from challenge for the summer after yesterday evening’s 1922 Committee meeting, but certainly still looking set to be highly vulnerable in the autumn, the BoE will watch closely this morning’s deluge of key UK data, including a first ever release of monthly GDP.

China’s CPI and PPI reports for June provided no major surprises today. The headline CPI fell 0.1%M/M but annual inflation still edged up 0.1ppt to 1.9%Y/Y – an outcome that was exactly in line with market expectations. Non-food inflation was steady at 2.2%Y/Y, but food price inflation crept up 0.2ppts to 0.3%Y/Y. Excluding food and energy, annual inflation was steady at 1.9%Y/Y. Meanwhile, as expected, the PPI pointed to an increase in pipeline inflation pressures. Indeed, the headline PPI increase of 0.3%M/M was slightly firmer than market expectations, and saw annual inflation rise 0.6ppts to 4.7%Y/Y – the fastest pace since December last year. The pick-up was driven in particular by the mining and materials sectors, reflecting the direct influence of higher commodity prices. In the manufacturing sector annual inflation picked up to 4.6%Y/Y from 4.4%Y/Y previously. Meanwhile consumer goods prices rose just 0.4%Y/Y, up 0.1ppt from May, with prices for consumer durables still falling 0.5%Y/Y.

Despite yesterday’s dramatic twin Cabinet resignations, yesterday evening’s 1922 Committee meeting of Conservative Party backbench MPs strongly suggested that Theresa May will not face a confidence vote before the summer recess in a fortnight’s time. But with the arch-Brexiter members of her Cabinet, such as Andrea Leadsom, seemingly laying down their own red lines for May – not least an undeliverable demand that no further concessions be made to the EU in the context of the negotiations – the autumn might well see the conspirators make their move to unseat the Prime Minister.

In the meantime, today’s economic data will be closely watched by the BoE as it seeks further reassurance that the slowdown in Q1 GDP growth was temporary and largely snow-related. Alongside the standard monthly IP data for May, the ONS will also publish services output data, and most notably, for the first time, a monthly estimate of GDP for the same month. After a shock 1.4%M/M fall in manufacturing output in April, a substantial bounce-back in this sector in May would appear inevitable, consistent with survey evidence from the PMIs and CBI. And data already published revealed that retail sales for the month rose sharply, perhaps in part due to early arrival of summer. Accordingly, a robust monthly estimate for May GDP appears to be on the cards, and bearing in mind the soft start to the quarter, would be consistent with our forecast of Q2 growth of 0.4% Q/Q. Trade figures for May are also due later this morning.

Meanwhile, the latest BRC Retail Sales Monitor released earlier today suggested that retail sales increased by 2.3%Y/Y in June, down from 4.1%Y/Y in May, albeit still a decent pace by recent standards. On a like-for-like basis, growth was also above-average at 1.1%Y/Y. Good weather and England’s successful World Cup seems to have raised consumers’ spirits, with the BRC citing a jump in sales of beer, barbecue and TVs. However, the feel-good factor failed to give a similar uplift for certain other categories, perhaps not surprising given the backdrop of still-very-subdued real wage growth. So overall, while food sales rose 1.7%3M/Y, the slowest pace in fifteen months, non-food sales were up a softer 0.8%3M/Y, still very weak by historical standards albeit the strongest such rate since last September. Going forward, the same factors are likely to have supported retail activity in July. But further ahead, weak consumer purchasing power might resume its role as the principal determinant of sales growth.

Euro area:
In contrast to the equivalent set of figures released in Germany at the end of last week, today’s French industrial production data brought a downside surprise. In May, total production was down for a third consecutive month, by 0.2%M/M, while manufacturing output fell by 0.6%M/M. Looking at the detail, production of consumer durables and capital goods was particularly weak, with weather-related energy output providing some offset. These monthly changes left total output falling in year-on-year terms for the first time since April 2017 (down 0.9%Y/Y), and looking at Q2 as a whole, the picture does not appear to be particularly positive, with the average level of output in April and May down by more than ½% compared to Q1. So unless we see a sharp rebound in June, French IP looks on track to subtract from GDP growth in Q2. And with the manufacturing PMI and Bank of France survey indicator for industry at or close to their lowest levels since Q416 in June, such a bounce-back might seem unlikely.

Not least given heightened trade-war fears, this morning’s ZEW survey for July seems likely to suggest that financial market analysts consider the current business situation to have deteriorated once again, extending the downward trend seen since the beginning of the year to the lowest level in more than a year.

It should be a relatively quiet day in the US, with only the NFIB small business optimism survey and the JOLTS job openings data due for release.

The focus today was on the release the NAB Business Survey for June, albeit the survey pointed to little change in sentiment from that conveyed a month earlier. Indeed, the closely-watched business conditions index printed at a robust +15 in June – the same reading as had initially printed in May before today’s slight 1pt downward revision. Firms’ assessment of trading conditions and profitability improved this month but the hiring intentions index slipped to an 18-month low. The headline business confidence index fell just 1pt to 6, marking the lowest reading since October 2016 (nonetheless still in line with the survey’s long-term average). Finally, firms reported that their output prices rose 0.4% over the past three months, thus remaining consistent with annual CPI inflation remaining below the RBA’s 2-3% target range.

New Zealand:
Today saw the release of the Electronic Card Transactions report – an indicator of retail spending based on payments processed electronically. Total spending in the retail sector rose 0.8%M/M in June – slightly ahead of market expectations and coming after a 0.2ppt upward revision growth in May (now 0.6%M/M). Core spending, which excludes spending on fuel and autos, rose 0.6%M/M for a second consecutive month. Despite the improvement over the past two months, the steep decline recorded in April means that total spending fell 0.7%Q/Q in Q2 – payback for very strong growth of 2.3%Q/Q in Q1. Core spending fell 0.3%Q/Q following growth of 2.0%Q/Q in Q1.

In other news, the ANZ Heavy Traffic Truckometer – a measure of traffic flows that is correlated with economic activity – fell 1.5%M/M in June following an upwardly-revised 3.9%M/M increase in June. Even so, the 3-month average rose a very strong 6.8%Y/Y.

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