Morning comment: China PMIs & euro area GDP

Chris Scicluna
Emily Nicol
Mantas Vanagas

Yesterday saw US stocks make little headway overall, with the S&P500 closing up just 0.1% on the day. And perhaps notably, Alphabet disappointed the market after-hours after quarterly earnings missed expectations. A firmer-than-expected personal spending reading for March, however, saw USTs initially lose ground too (10Y yields rose 4bps to 2.54% before falling back later in the day) despite weak income growth and another soft reading on the core PCE deflator.

Against that mixed backdrop, Asian markets today also had to contend with some disappointing Chinese PMIs for April, which saw declines in manufacturing and non-manufacturing indices alike (detail below). Nevertheless, China’s main equity indices made modest gains (CSI300 closing up 0.3%) although the picture across the region was mixed (e.g. the Hang Seng and KOSPI fell 0.6%). Aussie stocks also fell but ACGBs were only a touch firmer as data showed a further slowing in credit related not least to the ailing housing market. While Japanese markets remained closed for national holidays as Emperor Akihito’s abdication ceremonies commenced, the yen appreciated, moving through ¥111.4/$ a little while ago.

Moving to Europe, equity markets are largely weaker so far this morning while Bunds have made modest gains and BTPs losses. We have a particularly congested economic diary for the region, which has already seen French GDP figures slightly disappoint the consensus view but Spanish growth (not for the first time) surprise on the upside. The first estimates of euro area and Italian growth come later today. In addition, April inflation figures from Germany and Italy are due after the respective French and Spanish figures, also released already this morning, picked up, albeit with the upwards pressure seemingly related principally to the timing of Easter.

Euro area:
Today is very busy for economic data from the region with, most notably, the first estimates of euro area Q1 GDP and April inflation from the large member states on the docket. With respect to GDP, we have already received the figures from France and Spain. French growth aligned with our (sub-consensus) forecast of 0.3%Q/Q, the same pace as Q3 and Q4, to leave GDP up a moderate 1.1%Y/Y. Within the detail, growth was driven by domestic demand, with household consumption up 0.4%Q/Q and investment up 0.3%Q/Q. In contrast, net trade subtracted 0.3ppt from GDP growth, the most since Q317, as exports barely grew (up 0.1%Q/Q) while import growth was relatively firm (up 0.9%Q/Q). While government consumption was relatively muted (up just 0.1%Q/Q), inventories added 0.2ppt to GDP growth, also the most since Q317, support that would seem unlikely to be repeated in the current quarter.

In contrast to the French figures, however, Spanish GDP beat expectations, with growth of 0.7%Q/Q up 0.1ppt from Q4 and the strongest for five quarters, leaving output 2.4% higher than a year earlier. Household consumption slowed a touch (0.3%Q/Q) despite a 2.2% increase in the minimum wage at the start of the year. But having dipped the previous quarter, fixed investment was strong (up 1.5%Q/Q, the most in three quarters). While exports fell (down 0.5%Q/Q), imports were weaker still (down 1.1%Q/Q) to point to modest support to Spanish economic growth from net trade.

Looking ahead, when the figures are released later this morning, we continue to expect GDP growth in the euro area in Q1 to have remained unchanged from Q4 at 0.2%Q/Q, although the Spanish figure points to upside risks to that forecast. The figures from Italy are expected to report growth of 0.1%Q/Q, which would mark an end to the recession in H218 but also take the year-on-year rate into negative territory.

In terms of inflation, the flash estimates of April CPI from France and Spain both showed increases on the month. On the EU-harmonised measure, headline inflation in France aligned with expectations, rising 0.1ppt to 1.4%Y/Y, with the detail on the national measure attributing the rise to prices of services and core manufactured goods. But Spanish inflation was stronger than anticipated, rising 0.3ppt on the same basis to 1.6%Y/Y, with the upwards pressure attributed to higher prices in the tourism sector. Indeed, not least due to the impact of the timing of Easter pushing up services prices compared to a year ago, we expect inflation also to increase in Germany and Italy when those figures are out later this morning. And so we also anticipate a similar pattern in the euro area figures – both headline and core – when they are released on Friday. 

Among other new data from the region today, the euro area’s latest labour market figures are expected to show that the unemployment rate moved sideways for a second successive month in March at 7.8%, the lowest rate since late 2008. The latest German labour market figures, meanwhile, are expected to show a further modest decline in unemployment in April, to leave the jobless rate (on the national measure) unchanged at a post-reunification low of 4.9%. And against that firm labour market backdrop, according to the GfK survey released earlier this morning, German consumer confidence was steady at the start of Q2. The headline confidence index (which is reported as a forecast for May) was unchanged at 10.4, an elevated reading by historical standards but one that is nevertheless at the bottom of the range of the past couple of years. Perhaps encouragingly, the details of the April survey suggested that consumers’ willingness to buy has picked up to the highest level since January while income expectations are a touch stronger too.

In the markets, finally, Germany will sell 2Y Schatz while Italy will sell 5Y and 10Y bonds.

While speculation about Theresa May’s future persists – and reports suggested again last night that she’ll leave Downing Street by the autumn – and the opposition Labour Party is supposed today to clarify its position on a second Brexit referendum, household confidence was the main data focus in the UK overnight. As expected, the GfK consumer sentiment survey showed no change in consumer sentiment in April, with the headline indicator remaining at -13 for a third consecutive month. Indeed, overall, the index has been very little changed for the past six months, repeatedly signalling the weakest consumer sentiment since 2013 and suggesting that spending is likely to remain on a relatively subdued growth path ahead.

Within the GfK survey detail, there was, however, a small improvement in indicators related to the general economic situation, perhaps as the Article 50 extension provided consumers with more confidence that a no-deal Brexit scenario will not materialise. With these risks having receded, the survey also reported a notable decline in consumer motivation to save – the relevant index showed the biggest drop since the Brexit referendum. However, despite the fact that the labour market remains quite firm, with employment and wages continuing to grow at a decent pace, consumers’ assessment of their personal financial situation weakened, with both backward-looking and forward-looking indicators inching down to the lowest level since the end of last year. The climate for major purchases also deteriorated slightly to a five month-low. So while retail sales growth in Q1 surprise on the upside, with consumers still quite reluctant to make major purchases, we should expect a moderation in consumer spending this quarter.

While the Chinese economy appeared to have turned for the better at the end of the first quarter, with the March PMIs and monthly activity indicators alike pointing to a welcome pickup in growth, today’s April PMIs suggested that this boost might have reflected temporary factors, not least the impact of the timing of the Lunar New Year holiday this year, which kicked off on 5 February, eleven days earlier than in 2018, as well as an increase in shipments to the US as manufacturers potentially took advantage of the extended tariff ceasefire. Certainly, the manufacturing PMIs disappointed, with the government’s official index unexpectedly falling 0.4pt to 50.1, while the private sector Caixin index fell 0.6pt to 50.2, with both surveys broadly signalling stagnation in the sector. With respect to firm size, large and medium-sized manufacturers were less upbeat about conditions in April, with the respective indices declining 0.3pt to 50.8 and 0.8pt to 49.1 respectively. But while small manufacturers were more optimistic this month with the relevant PMI rising to a six-month high, at 49.8 it was still consistent with mild contraction.

Overall, the government’s manufacturing survey reported a larger drop in the output component, down 0.6pt to 52.1, albeit this was still almost 1pt higher than the average in Q1. And the new orders index was also a touch lower on the month to 51.4, although this was similarly higher than the average in Q1. But the most notable weakness reflected employment conditions in the sector, with the relevant PMI down to 47.2, the lowest reading since the start of 2012. Turning to the inflation-related indices, while there was a modest drop in the input price PMI, at 53.1 this was still the second-highest reading for six months. And the output price index rose to a six-month high of 52.0, perhaps reflecting the ongoing upwards inflationary pressures emanating from higher food prices.

With respect to the non-manufacturing survey, the headline PMI fully reversed the 0.5pt increase recorded in March to leave the index at 54.3 in April. The new orders component similarly gave back most of March’s 1.8pt gain to leave the PMI at just 50.8. And while the employment PMI moved sideways in April, at 48.7 it indicated negative job growth in the services sector too. So, overall, while the composite PMI fell 0.6pt in April this followed a much larger increase in March and the index still remained comfortably in expansionary territory at 53.4, above the average level in both Q119 and Q418. 

While the latest weekly consumer confidence indicator signalled a notable rebound in April from the sharp decline in March, today’s RBA money and credit aggregates suggested a further softening of credit growth last month. Indeed, while private sector credit increased 0.3%M/M, this still left the annual rate of growth declining 0.2ppt to a more-than five-year low of 3.9%Y/Y. Housing credit growth also eased to 4.0%Y/Y, its weakest annual growth since the series began in 1977, weighed down by investor housing credit which up just 0.7%Y/Y. And other personal credit fell for the sixth consecutive month in March to leave it down 2.8%Y/Y. In contrast, business credit rose at the fastest monthly pace since October, to leave annual growth down 0.2ppt to a still-healthy 4.9%Y/Y.

In the US, the Conference Board’s consumer survey and Chicago PMI reports for April are due later today alongside pending home sales for March, S&P CoreLogic house price data for February, and the Employment Cost Index for Q1.

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