Japanese PMIs imply recovery in services

Chris Scicluna
Emily Nicol

Risk-off mood returns as new Chinese support measures underwhelm
While China’s news agency confirmed a lengthy set of new, albeit arguably modest, economic support measures – from VAT rebates, subsidies, and support for loans to SMEs, to commitments on supply chains, energy security and tech listings – stock markets in the Asia-Pacific were unimpressed today. With the measures highly unlikely to neutralise the highly adverse impact of China’s ongoing zero-Covid policy, the CSI300 and Hang Seng are currently down about 2% on the day, while the TOPIX closed down 0.9% despite an improved Japanese services PMI survey as the equivalent manufacturing indicators pointed to challenging conditions. The broader mood is more downbeat too, with US S&P minis down 1.4% and those for the NASDAQ down more than 2%, and European markets set to open lower too.

USTs a touch firmer, but euro govvie yields up again in the wake of ECB rate signal
Given the risk-off mood, USTs are firmer across the board, albeit with yields only a couple of bps lower across the curve, with investors having been underwhelmed by a suggestion yesterday by FOMC member Bostic that the Fed might even consider a pause in its tightening cycle in September after two further 50bps hikes between now and then. And following yesterday’s upwards shift in the wave of Christine Lagarde’s signal of two ECB rate hikes in Q3, euro govvie yields are up again today, with Italy and Spain underperforming on the risk-off mood.

Japanese flash PMIs imply recovery in services, but challenging manufacturing conditions
There were no major surprises from today’s Japanese flash PMIs, which signalled a moderate recovery in services activity, but more challenging conditions for manufacturers. In particular, the headline services index rose for the third consecutive month in May, by 1pt to 51.7, a five-month high. And there was reportedly a notable improvement in demand, with the new orders component up 3.3pts to 52.5, despite still little to no support from tourism – the new export orders PMI slumped to just 44.4. The manufacturing survey was notably less encouraging, with the output index down 1.3pts to 50.5 as demand for new orders eased and supplier delivery times lengthened. Both manufacturers and services firms reported a further increase in input costs this month. And there were signs that firms were starting to pass on some of these burdens, with the composite output price PMI rising 1pt to 55.5, also a series high.

Underlying inflationary pressures continue to broaden in Japan
While Japan’s headline CPI jumped 1.3ppt to 2.5%Y/Y in April, a 7½-year high, this principally reflected data distortions associated with past government policy initiatives. But today’s BoJ estimates of underlying inflation suggested that underlying price pressures had broadened last month too. According to the BoJ, prices of roughly 69% of the CPI basket items were up compared with a year earlier, the most for six years. And so, Japan’s trimmed mean CPI estimate jumped 0.3ppt to 1.4%Y/Y, the highest since the series began in 2001! Admittedly, this remains a long way below similar measures in the US (6.2%Y/Y) and euro area (5.6%Y/Y).

Euro area flash PMIs set to point to ongoing services recovery
In the euro area, today brings the key preliminary PMIs for May. The headline euro area services activity PMI is expected to point to continued expansion this month, with the index expected to move broadly sideways (57.7) as the sector continues to normalise after the latest pandemic wave. In contrast, the manufacturing output index is likely to remain close to 50, implying still challenging conditions amid persisting supply constraints and elevated costs. Overall, the composite PMI is forecast to fall 0.7pt to 55.1, still nevertheless consistent with ongoing expansion. Following yesterday’s improved ifo survey, the flash German PMIs might well surprise on the upside. But this morning’s French INSEE survey was somewhat mixed, with the headline business sentiment index moving sideways in May at 106. There were improvements in services (up 1pt to 108) and retail (up 5pts to 98), but a further loss of momentum in manufacturing (down 2pts to 106) as firms were the most downbeat about the production outlook since November 2020.

UK flash PMIs to signal a further loss of momentum amid higher living costs
The main UK economic release today will also be the flash manufacturing and service sector PMIs for May, which are expected to suggest some loss of recovery momentum – albeit continuing to point to a steady expansion in activity – as the cost of living crisis and heightened global economic uncertainty took their toll. In particular, the headline services index is expected to fall almost 2pts in May, after declining to a three-month low of 58.9 in April. And as a result, the composite PMI is similarly forecast to decline almost 2pts to a four-month low of 56.5. Similarly, following the surprise pickup in retail sales in April, the latest CBI distributive trades survey is likely to point to weakening activity on the high street this month given the increasing squeeze on household budgets from high inflation.

US flash PMIs and new home sales data due
Like elsewhere, May’s flash PMIs will also be published in the US today. These are expected to report only a modest easing in the headline services index (from 55.6 in April) to leave the composite output PMI little changed from the 56.0 reading in April and therefore on track to be some 1pt higher than the Q1 average. Indicators of supply-chain strains will also be watched. New home sales figures, meanwhile, look set to report the fourth consecutive monthly decline as elevated prices and higher mortgages rate continue to constrain demand. 

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.