China’s Caixin services PMI plummets to 2-year low on Covid restrictions
Today’s Caixin services PMI survey offered a pretty bleak assessment of conditions in the sector at the end of the first quarter, as activity reportedly plummeted amid the surge in coronavirus cases and associated tighter restrictions. Certainly, the drop in the Caixin headline activity index – which tends best to reflect developments in private sector SMEs – was more than double that recorded in the government’s official measure, down 8.2pts to 42.0, the lowest reading since February 2020 (26.5). There was also a further notable drop in the new orders PMI, to 45.9 the lowest since the onset of the pandemic, reflecting weakness in both domestic and external demand. While firms remained generally upbeat about the outlook for the coming year, optimism still fell to the lowest in nineteen months. And so the survey suggested that firms scaled back slightly their workforces for the third consecutive month.

Taken together with the weakness in the manufacturing output PMI (46.4), the Caixin composite output PMI fell 6.2pts in March to 43.9, the lowest since February 2020, to leave the quarterly index down almost 4pts on average in Q1 at 48.0, firmly in contractionary territory. With respect to inflationary pressures, companies noted higher costs for raw materials, energy, food, transport and greater expenditure on pandemic-protection measures, which saw the input price index (54.2) rise back above the long-run average, albeit remaining well below the equivalent indicators from the other major economies. And notably perhaps, the output price PMI fell for the second successive month to just 50.9, a seven-month low.

German factory orders down in February on weak foreign demand; turnover data signal drop in manufacturing output tomorrow
The outlook for Germany’s manufacturing sector has darkened markedly on intensified cost pressures, a renewed tightening of supply restraints, uncertainty about the future of Russian energy imports and a questionable demand outlook. Indeed, today’s factory orders data for February showed that, even before the full economic and financial impact of the Russian invasion in Ukraine had been felt, orders fell by a larger-than-expected 2.2%M/M. Admittedly, this followed three consecutive increases to be still almost 3% higher than a year earlier and still trending so far in Q1 almost 4% higher than the Q4 average. When excluding major items, the drop in February was somewhat more modest (-1.6%M/M), to leave orders so far in Q1 compared with Q4 on average up a softer 1.1%.

The weakness in February was driven by overseas orders, which fell 3.3%M/M, while domestic orders were broadly flat (-0.2%M/M). Within the sector breakdown, orders for metals production declined a sizeable 13.8%M/M (partly reversing the 17½% increase in January), with autos equipment and chemicals down 3½%M/M. Overall, orders for intermediate goods fell for the second successive month (-1.9%M/M), while capital goods orders (-2.8%M/M) reversed some of January’s strength. Consumer goods orders rose 0.7%M/M, but this followed marked weakness at the start of the year.

Today’s release also reported the first decline in manufacturing turnover in five months, likely at least in part due to supply bottlenecks affecting the availability of intermediate goods. Nevertheless, the 1.4%M/M decline in turnover still left it trending in the first two months of the year more than 2½% higher than the Q4 average. But the figures suggest that there is a notable downside risk to tomorrow’s industrial production release, with the Bloomberg consensus for an increase of 0.2%M/M likely to be far too optimistic in the absence of vigorous growth in the construction sector.

Euro area PPI inflation set to rise to new record high; construction PMIs should signal ongoing growth in the sector
Looking ahead, euro area producer price figures for February are expected to reveal a further increase in inflation above January’s series-high rate of 30.6%Y/Y, but given the subsequent surge in wholesale gas and oil prices these are bound to be exceeded very significantly in March. The March construction PMIs, however, are expected to imply ongoing expansion in the sector, led by housebuilding, despite persisting supply-side challenges. In addition, dovish Chief Economist Lane is due to part in an economic forum panel discussion on inflation, while hawkish Executive Board member Schnabel will participate in a conference on financial integration and stability.

UK construction PMIs to suggest firm momentum in the sector despite supply restraints
A relatively quiet day for UK economic releases similarly brings the March construction PMIs, which should suggest that activity in the sector remained firm last month despite ongoing shortages of labour and materials and associated cost pressures. The headline activity index rose to an eight-month high of 59.1in February, and a similar reading might be in order for March.

Fed balance sheet policy the main focus of FOMC minutes; a quiet day for US data ahead
While it’s set to be a quiet day for US economic data, with only the usual weekly mortgage applications figures due, the March FOMC meeting minutes will be closely watched, and all the more so in light of recent hawkish Fed-speak. While Powell’s press conference and the updated economic projections and dot-plots published after the meeting mean there should be few surprises, the minutes are set to provide further information on the likely shape of the Fed’s balance sheet run-off plans, which now look set to be operationalised following next month’s FOMC meeting. Today’s minutes could provide specific information on the levels of the monthly caps that will govern the roll-off of the Fed’s UST and MBS holdings, as well as the likely pace by which those caps will be increased over time. A faster pace of balance sheet run-off has already been signalled than occurred during the previous phase of QT between 2017 and 2019. On that occasion, the initial caps for roll-off were $6bn per month for USTs and $4bn per month for MBS, eventually rising to $30bn per month for USTs and $20bn per month for MBS.