Edge and Odds

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CHINA SERVICES PMI SLUMPS FROM 53.5 TO 51.8

HSBC China Composite PMI™ data (which covers both manufacturing and services) pointed to a further rise in total business activity in China during June. However, the rate of expansion eased to a marginal pace that was the slowest recorded since May 2014. This was signalled by the HSBC Composite Index posting only slightly above the neutral 50.0 mark at 50.6 in June, down from 51.2 in May.

The decline in the headline index was partly caused by a further fall in manufacturing output in June (albeit marginal), but also due to a moderation in the rate of service sector activity growth. Moreover, it was the slowest expansion in services business activity since January, as signalled by the HSBC China Services Business Activity Index posting 51.8, down from May’s eight-month high of 53.5.

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The slowdown in services activity growth reflected softer new business gains in June, with service providers signalling the slowest increase in new orders in 11 months. According to panellists, relatively subdued market conditions had dampened overall client demand. Meanwhile, manufacturers saw only a marginal expansion of new work, following a three-month sequence of contraction. As a result, composite new business increased only modestly over the month.

Slower growth of activity and new orders led service sector companies to raise their staff numbers at a weaker rate in June. Furthermore, the pace of job creation was the slowest in three months and only marginal. In contrast, manufacturers cut their payrolls for the twentieth successive month in June, with the latest reduction the sharpest since February 2009. The particularly marked reduction in manufacturing staff numbers therefore led employment to fall modestly at the composite level in June.

Outstanding business at services companies declined modestly in June, which was generally linked by panellists to higher workforce numbers and slower growth of new work. Meanwhile, manufacturers saw backlogs of work increase slightly over the month. At the composite level, unfinished workloads fell fractionally in June.

Chinese service providers saw a further increase in total cost burdens during June. That said, the rate of input price inflation was only slight and much weaker than the series average. Cost burdens faced by manufacturers meanwhile continued to decline, though the latest reduction in input costs was the slowest since last August. Overall, average input prices fell slightly at the composite level.

Prices charged fell across both the manufacturing and service sectors in June. While manufacturers reduced their selling prices modestly, service providers cut their charges only slightly.

Services companies operating in China continued to signal optimism towards the 12-month business outlook in June. That said, the overall degree of positive sentiment edged down to its lowest since July 2014.

JAPAN SERVICES PMI STRENGTHENS

Business conditions in the Japanese service sector improved in June. Activity increased at the fastest rate since September last year, alongside a sharper rise in new orders. Subsequently, prospects towards activity over the coming year strengthened. Employment levels, on the other hand, declined for the first time in three months, albeit fractionally. Meanwhile, cost burdens were evident, as input costs increased and at the fastest rate this year so far.

At 51.8 in June, up from 51.5 in May, the seasonally adjusted Nikkei Business Activity Index signalled further positive improvements in business conditions at Japanese services companies. Business activity has increased in every month during the second quarter of the year. Furthermore, the latest reading was the highest since September last year. According to respondents, an improvement in economic conditions and a rise in sales volumes led to the latest expansion.

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Meanwhile, the rate of improvement in operating conditions at Japanese goods producers weakened in June. That said, the Nikkei Composite Output Index indicated a sustained expansion in overall activity by posting at 51.5 in June, which was in line with the average over the past two years. New business at service sector providers rose for the third consecutive month in June. Moreover, the rate of growth reached a seven-month high and was solid overall. Panellists mentioned a rise in international clients and an improvement in the domestic economy leading to an increase in new work intakes. In contrast, manufacturers reported a contraction in new orders.

Meanwhile, pressure on capacity was evident at Japanese services firms, as backlogs of work accumulated, in line with further increases in both activity and new orders. Moreover, the rate of accumulation picked up from the prior month and was faster than the average seen in the first half of this year.

Despite reports of improving business conditions, service sector providers reduced their staffing levels in June for the first time in three survey periods. However, the rate of job shedding was only fractional. In contrast, employment levels in the manufacturing sector remained in modest growth territory.

On the price front, inflationary pressures persisted at Japanese services companies, as input prices rose and at the fastest rate since December 2014. According to respondents, increases in both raw material costs and staff wages led to the latest rise in purchasing prices. Meanwhile, service sector charges rose at the quickest rate in seven months, as companies tried to reduce their cost burdens. Similarly, manufacturing purchasing costs rose, albeit at the second weakest pace in the 30-month period of inflation, while charges rose at the fastest rate since January.

Finally, business sentiment was in line with the average seen so far in 2015, having strengthened from May’s 14-month low. Expectations of an economic recovery, development of new products and an anticipated rise in sales volumes were cited as key reasons behind the optimism.