Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

EUROZONE COMPOSITE PMI POINTS TO WEAK GROWTH

Eurozone economic growth remained subdued during May, with the rate of expansion achieved so far during the second quarter a touch below that seen in quarter one.

The final Markit Eurozone PMI® Composite Output Index ticked higher to 53.1, up from 53.0 in April and the earlier flash estimate of 52.9. However, the past four months have seen economic growth hold broadly steady at February’s 13-month low.

image

The upturn was again led by the service sector, which saw a modest growth acceleration. Manufacturing production also continued to rise, albeit at a slightly lesser pace than in April.

National data pointed to a broad-based expansion of output, with growth registered across the ‘bigfour’ economies and Ireland. Rates of increase accelerated in Germany, France and Ireland, but eased in Spain and Italy. Growth rates in France and Italy were lacklustre in comparison to the solid expansions seen elsewhere.

New business growth slipped to a 16-month low in May, suggesting a strong likelihood that output expansion will remain subdued in coming months.

Brighter news came from the labour market, however, with job creation hitting a four-month high. German employment rose at the fastest pace since January, while Ireland also saw quicker jobs growth. Staffing levels also rose in Italy and Spain. France reported a reduction in headcounts for the second time in the past three months. A slight increase at French service providers was more than offset by manufacturers cutting jobs at the steepest pace since August 2014.

May data suggested economic capacity is broadly matching current demand requirements. This was highlighted by the trend in backlogs of work, which showed little change during the latest survey period.

Price gauges continued to move higher in May. Average cost inflation accelerated to a ten-month high, mainly due to a firming of commodity prices (notably oil) and increased staff costs at service providers. Although selling prices continued to fall, the pace of deflation was only mild and the weakest during the year-to-date.

Companies in both the manufacturing and service sectors reported that lower output charges were in response to ongoing price competition and softer market conditions. Only Germany and Ireland saw selling prices rise. Spain registered no change, while charges fell further in France and Italy.

Services:

The final Eurozone Services Business Activity Index posted 53.3 in May, a three-month high and above the earlier flash estimate of 53.1. However, the average headline index reading so far in the second quarter is a touch below that registered in the opening quarter.

Germany, France, Spain and Ireland all reported accelerated growth of business activity in May. Italy slipped into contraction territory, registering a slight decrease in activity for the first time since December 2014.

With the rate of growth in incoming new orders at eurozone service providers easing to a 16-month low and business confidence sliding to its lowest since last November, the data suggest that a near-term growth revival is unlikely.

The ‘big-three’ nations all saw inflows of new business rise at slower rates, in contrast to the mild accelerations in Spain and Ireland.

Employment in the euro area service sector increased for the nineteenth successive month in May. Furthermore, the pace of jobs growth edged up to a three-month high. Staffing levels were raised in each of the nations covered by the survey.

Ireland and Germany registered the steepest increases, with rates of job creation hitting three- and five-month highs respectively. Spain also saw a slightly faster expansion of staffing, while France and Italy saw slower rates of jobs growth.

Input price inflation accelerated to a near three-and-a-half year high. Companies attributed higher costs to a firming of certain commodity prices, increased transportation and energy costs and rising staff wages and salaries. Meanwhile, output charges decreased only marginally. Higher selling prices in Germany, Spain and Ireland were offset by further discounting in France and Italy.

Chris Williamson, Chief Economist at Markit said:

The survey data are signalling a GDP rise of 0.3% in the second quarter, suggesting the growth spurt seen at the start of the year will prove frustratingly short-lived.
“June looks likely to prove equally disappointing, as inflows of new business slowed in May to the weakest for almost one-and-a-half years. (…)

image

CHINA COMPOSITE PMI SLOWS TO 50.5

Caixin China Composite PMI™ data (which covers both manufacturing and services) pointed to a further increase in total Chinese business activity during May. However, the Composite Output Index posted 50.5, down from 50.8 in April, to signal the slowest rate of expansion in the current three-month sequence of growth.

May survey data indicated that overall Chinese business activity growth weakened for the second month in a row, as services activity expanded at a slower rate and manufacturers reported a fractional fall in production for the second consecutive month. Furthermore, it was the weakest increase in service sector business activity since February, with the Caixin China General Services Business Activity Index registering 51.2 in May, down from 51.8 in the previous month.

image

Reflective of the trend for service sector business activity, new business placed at service providers also rose at a slower pace in May. Furthermore, the rate of increase was modest and remained slower than the historical average. Some monitored firms commented that new product launches had helped to lift sales in the latest survey period. In contrast, total new orders at goods producers declined for the first time in three months during May, albeit only slightly. As a result, composite new business rose marginally in May, with the latest increase the slowest since February.

Service sector employment rose for the second month running in May, though the rate of job creation remained marginal overall. Some companies mentioned that restructuring plans had acted as a brake on staff hiring. Meanwhile, further steep job cuts were registered across the manufacturing sector in the latest survey period. As a result, employment at the composite level fell again in May, and at the same modest pace as recorded in April.

Volumes of unfinished work at Chinese services companies rose for the second successive month in May, albeit at a fractional pace. The level of work-in-hand (but not yet completed) also rose marginally across manufacturing firms in the latest survey period

Cost pressures eased across both the manufacturing and service sectors in May. Input price inflation weakened to only a modest pace at service providers, with the rate of increase remaining slower than the series average. Growth in manufacturing cost burdens also slowed in May, with the sector also recording a modest rise in input prices overall.

May data indicated that both monitored sectors raised their output charges, with a number of companies increasing their prices due to higher cost burdens. However, services companies increased their selling prices at a marginal rate that was identical to that seen in April. Charge inflation meanwhile slowed across the manufacturing sector and was modest overall.

Service sector optimism towards the 12-month business outlook dipped to its lowest level in 2016 so far in May. A number of companies forecast that improving client demand and planned company expansions will support higher business activity over the next year, but there were reports that an uncertain economic outlook weighed on the overall level of business confidence.