Morning comment: US & UK retail sales, euro area PMIs

Mantas Vanagas
Emily Nicol

Against the backdrop of a subdued equity market performance in the US yesterday – the S&P500 ended  the day 0.2% lower – most major  Asian equities markets reported loses today. In Japan, the TOPIX was down by 1% amid reports of weak business sentiment at the start of Q2 (more on this below). Chinese equities were down around ½% despite further positive noises from the US-China trade talks, which suggested that the trade deal between these two countries could be concluded in May. Other major markets were also in the red with Hong Kong’s Hang Seng down by 0.6%, South Korea’s Kospi by 1.4% and Singapore’s Straits Times by 0.3%. Indonesian equities were a notable exception – they posted a 0.5% gain as reports emerged that the incumbent president Joko Widodo is set to be reelected. Aussie equities also edged higher on the back of a decent labour market report. Looking ahead, today’s retail sales reports from the UK and US will be closely watched, while the flash euro area PMIs will be worth following for clues about the current conditions in manufacturing sector in Germany and other member states.

While yesterday’s revised IP figures suggested that manufacturing output was on track for a notable decline in the first quarter – the average level in the first two months of the year was almost 2% lower than the average in Q4 – the early indicators for manufacturing in Q2 have also been somewhat discouraging. Certainly, today’s manufacturing PMI maintained a downbeat tone, with the headline index rising just 0.3pt to 49.5 in April and thus remaining below the crucial 50-level for a third consecutive month. After reaching a near 3-year low last month, the output index increased 0.9pt to 47.9 (in line with the average in Q1) and the employment index increased 0.8pt to 52.2. However, the new orders index rose just 0.2pt to 47.8 and the new export orders index fell 1.1pts to 47.1. The pricing news was also mixed, but essentially pointed to little change in the subdued inflationary environment. In particular, the output prices index fell 0.2pt to 51.8, but the input prices index rose 0.1pt to 55.4.

The Reuters Tankan survey for April, also released today, similarly pointed to a relatively downbeat picture. The headline manufacturing diffusion index (DI) suffered a sixth consecutive decline, falling 2pts to +8 – the lowest reading since September 2016. On balance sentiment remained negative in the steel and metals and precision machinery sectors and optimism fell sharply in the auto manufacturing and chemicals sectors. Looking ahead, the aggregate ‘forecast’ DI rose 2pts to +13, indicating that on balance firms’ expect business conditions to improve only slightly over the coming three months. More encouragingly, after stabilising last month, optimism amongst non-manufacturers improved slightly in April. The headline DI for this sector picked up 2pts to +24, with all industries retaining a net positive assessment of business conditions. The forecast DI also rose 2pts to +25, indicating that firms were inclined to expect a marginal improvement in business conditions over the next three months.

Euro area:
The dataflow today brings arguably the most noteworthy euro area release of the week with the latest PMIs for April. A month ago they surprised on the downside prompting a sharp market reaction, and this time the survey indicators will be scrutinised for hints of a pickup in economic momentum at the start of the second quarter. While a modest improvement is anticipated in the manufacturing PMI, it will almost certainly remain firmly in contractionary territory. And with the services PMI likely to have moved broadly sideways, the composite PMI is expected to be little changed from the 51.6 reading in March, still close to the bottom of the range of recent years but consistent with ongoing expansion nonetheless. While Germany’s manufacturing PMI seems bound to have risen from the 6½-year low of 44.1 in March, the composite PMI is expected to have moved broadly sideways at 51.4. And although France’s composite PMI is expected to have shifted higher, it will likely remain below the key 50-level. Supply-wise, France will sell fixed-rate and inflation-linked bonds with a range of maturities. 

Following releases of the latest labour market and inflation data earlier this week, attention in the UK today turns to the retail sector, with the release of the latest official sales figures for March. After a strong start to the year, with the average level of sales in January and February 1.0% higher compared with Q4, we would expect a much weaker showing in the final month of Q1 in line with various retail sector surveys. Indeed, market consensus is for a drop of 0.3%M/M, which would almost fully reverse the increase seen in February, although we would not be surprised to see a steeper decline. Also of interest today will be the BoE’s latest quarterly credit conditions survey. Three months ago the survey suggested that availability of credit to UK households decreased at the end of last year, thanks to subdued economic outlook, lower banks’ appetite for risk and weak housing market. We expect the survey to show little improvement in the credit conditions at the start of this year.

It will be a busy day for new economic data releases in the US with the key focus on March retail sales figures, which are likely to be boosted in part by stronger auto sales. But even excluding autos, sales are expected to post a solid rise following the decline in February. We will also get the preliminary PMI readings and Philadelphia Fed manufacturing survey for April, the Conference Board’s leading index for March and the business inventory report for February. In the markets, the Treasury will sell 5Y TIPS.  

The domestic focus in Australia today was firmly on the labour market, particularly in light of the latest RBA Board meeting minutes, which suggested that a policy rate cut would likely be warranted if the unemployment rate was to begin to trend higher. In summary, the Labour Force survey for March provided no obvious support for that scenario, which the RBA has hinted required a sustained rise in the unemployment rate. Admittedly, the number of people unemployed rose in March by 17.1k (more than reversing the decline in February) to leave the unemployment rate up 0.1ppt to 5.0%, although still ½ppt below its level a year ago. The detail was somewhat more encouraging with growth in employment stronger than expected – rising an above-trend 25.7k in March, to leave annual growth edging higher to a very robust 2.4%Y/Y, the firmest rate for five months. Full-time employment rose a healthy 48.3k (a pace exceeded only once in the past sixteen months) following a modest drop in February, while part-time employment fell 22.6k after rising 12.4k previously. Finally, the labour force participation rate edged up 0.1ppt to 65.6, just above the average of the past twelve months.

Elsewhere, the NAB quarterly business survey, which reported a further downward trend in business conditions in the first quarter, with the relevant index declining 5pts to +4 in Q1, to leave it only just above its long-run average. And against the backdrop of weaker orders, there was a further drop in business confidence suggesting the near-term outlook for conditions was less positive too – indeed, the relevant index fell 2pt to -1, its lowest reading since Q412.

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