Economic Outlook – 26 June 2022


• Markit’s flash composite PMI cooled from 53.6 in May to a 5-month low of 51.2 in June. While still above the 50-point mark separating expansion from contraction, this result was the second weakest since July 2020, when the economy was emerging from a pandemic-induced lockdown. New orders across the private sector were the weakest since May 2020 while work backlogs fell for the first time in two years. With regards to employment, Markit’s report stated that “despite ongoing reports of challenges hiring or retaining staff, weaker client demand and reduced pressure on capacity led to some firms not replacing leavers.” Input price inflation was the weakest in 5 months, but remained acute compared to historical standards as food, fuel, transportation and wages continued to exert upward pressure on prices. Interestingly, while output charges continued to be supported by the passthrough of higher cost burdens, more and more firms reported offering discounts “to encourage customer spending and ward off competitors.” With demand fading fast and margins being eroded by higher prices/wages, business confidence dropped to its lowest level since September 2020

• The manufacturing sector tracker fell from 57.0 to a 23-month low of 52.4, marking one of the largest monthly declines in data going back to 2007. New orders and production contracted in the month as inflation, material shortages and delivery outlays “led some customers to pause or lower their purchases of goods.” Work backlogs also shrank, leading to a slowdown in employment growth. Confidence for future output among manufacturers fell to its lowest level in 20 months. “Despite hopes that demand will improve and investment increase, concerns regarding inflation, interest rates, supply chain disruption and the health of the wider economy weighed on expectations”, the report said.

• The services sub-index, for its part, decreased from 53.4 to a 5-month low of 51.6. Incoming new business (from 54.7 to 47.2) slumped, as did work backlogs. Job creation was the weakest in four months

• After falling 8.6% in February, 3.0% in March and 2.6% in April, existing-home sales dropped another 3.4% in May to 5,410K (seasonally adjusted and annualized), bringing the total drawback over four months to 16.6%. This was also the lowest level of sales observed in nearly two years. Contract closings sagged for both single-family dwellings (-3.6%) and condos (-1.6%)

• The slump in housing demand is in large part a response to deteriorating affordability from the sharp increase in interest rates. Thirty-year mortgage rates are already near 6% – almost double their level at the start of the year, and a level not seen since 2008. The Fed is focused on bringing inflation down from its 40-year high with aggressive interest rate hikes. So the emergence of any respite is unlikely on the rates side anytime soon. As a result, home sales is expected to trend lower in the quarters ahead, while prices also likely to give back some of the recent gains starting later this year. A tight inventory backdrop will help limit some of the downside

• Initial jobless claims eased from 231K to 229K in the week to June 18. Continued claims, for their part, edged up from 1,310K to 1,315K. These low levels reflect the vitality of the job market in the United States

• Powell presented the Federal Reserve’s semiannual Monetary Policy report to the Senate Committee on Banking, Housing, and Urban Affairs on Wednesday and to the House Committee on Financial Services on Thursday. In his testimony, Chair Powell mostly reiterated sentiments that were already expressed in the FOMC statement and press conference that followed last week’s FOMC meeting when the Committee increased the target federal funds rate by 75 bps. In short, the Fed views broadening price pressures as a significant risk to the long-term health of the economy and intends to do what is necessary to bring down inflation closer to its 2% target. Overall, Chair Powell’s testimony lends credence to the current view that the FOMC is likely to follow up June’s 75 bps hike with another 75 bps increase at the next meeting in July. Furthermore, Powell’s comments this week add to the evidence that, while 75 bps hikes are not likely to become common, the FOMC will continue to raise the federal funds rate at an expeditious pace over the coming months

• During Chair Powell’s testimony, he fielded several questions from lawmakers on the current state of the housing market. At the FOMC press conference last week, Powell stated that Fed officials were closely monitoring the recent climb in mortgage rates and that perhaps homebuyers were in need of a “reset.” The tone sounded ominous; however, Powell was merely suggesting that the housing market needs to return to a more balanced state where supply is more in line with demand and where home price growth is more closely matched with income growth. The pandemic produced an increased need for household space and ignited a surge in demand for single-family homes. Meanwhile, inventories fell to historic lows. The supply and demand imbalance has pushed up home prices at a pace well ahead of incomes, putting homes out of reach for many buyers

• Long-term inflation expectations, as measured by the University of Michigan Survey of Consumers, moderated in the final June reading to 3.1% from 3.3% in the preliminary view. The Fed cited the jump in inflation expectations as one of the catalysts for last week’s three-quarter-point hike in the fed funds rate

• The results of the Fed’s annual stress test of 34 large banks found that the companies can withstand a severe recession. Collectively, under the severe scenario, the banks would lose more than $600 billion but would be able to continue lending to households and businesses

• Signs that inflation might be moderating as growth cooled helped stocks rally sharply over the holiday-shortened week, lifting the S&P 500 Index out of bear market territory. Nearly every sector in the index recorded strong gains. Energy stocks were the notable exception, as oil continued to back off from its recent highs over most of the week. Month- and quarter-end flows may have increased trading volumes, as did the rebalancing of Russell indexes following the close of trading Friday. Markets were closed on Monday in their first observance of June tenth

• In terms of data release, durable goods are out on Monday. Demand for durables has remained fairly resilient in the face of persistent supply chain issues and more recent fears of an impending slowdown. The new orders component from the ISM manufacturing index rose to 55.1 in May, signaling a faster pace of expansion compared to April. When data prints next week for durables, continued improvement will be looked for in orders

• Personal income and spending is out on Thursday. Most consumer data suggest weakness in May. Retail sales slid 0.3%, marking the first decline in six months, and consumer sentiment slid to an 11-year low before slipping further to a record low in June. This weakness is expected to have spilled over into the personal spending data for May and forecast spending rose just 0.4% last month. Notably, that still suggests consumption growth held up at a decent clip. Furthermore, higher prices for specific goods, like gasoline and groceries, are providing upward pressure on these nominal spending estimates


• UK Retail sales have come out down -0.5% MoM, -4.7% YoY broadly in line with expectations. The trend rate of decline in volume has been reasonably steadily downward since June 2021. In the three months to May 2022, sales volumes fell by 1.3% when compared with the previous three months. The fall in sales volumes over the month was largely because of food stores, which fell by 1.6%; reduced spending in food stores seems to be linked to the impact of rising food prices and the cost of living. Overall sales volumes were 2.6% above their pre-Covid, although food stores were 2.5% below Feb 2020. Looking into what sits behind these figures, price rises are the key element. The Office for National Statistics Opinions and Lifestyle Survey (OPN), covering the period 11 to 22 May 2022, finding that 88% of adults reported that their cost of living had increased over the last month, up from 62% when this question was first asked (3 to 14 November 2021). The most common reason reported by adults who said their cost of living had increased was an increase in the price of food shopping (93%), with 44% of adults reported that they were buying less food when shopping. The proportion of online sales fell to 26.6% from 27.1% in April 2022, our expectation is that this will prove to be the approximate long-term sustainable level of online shopping, with people’s habits having permanently changed in many circumstances. Adding to this, the cost of living pressures put a premium on shopping for bargains, something that can in many cases be more effectively carried out through online shopping

• UK Business PMIs for June have stablised and continue to register above 50 (indicating expansion). Flash Composite Output Index is at 53.1 (unchanged from May); Services PMI is at 53.4 (again, unchanged from May) and Manufacturing PMI is at 53.4 (down from 54.6 in May). The UK Manufacturing Output Index is now at 51.2 (May: 51.6). This data indicates that output growth across the UK private sector is pretty much unchanged from the 15-month low observed in May. Service providers continue to outperform manufacturers. Manufacturers are reporting weaker demand along with ongoing supply issues, with manufacturing order books being especially subdued. New order volumes as a whole dropped from 53.8 to 50.8 in June, but manufacturing order books registered an index below 50 (indicating contraction). The service sector, on the other hand, continues to see benefit from a sustained recovery in events and other face-to-face business activity – although concerns about challenges arising from the cost of living crisis and economic uncertainty do weigh on the private sector across the board


• Markit’s flash composite PMI for the Eurozone fell from 54.8 in May to a 16-month low of 51.9 in June. Employment growth across the private sector moderated to a 13-month low as new orders stalled (from 53.3 to 50.0). Input/output price inflation eased somewhat but polled companies continued to report upward cost pressures from energy, transportation and wages. Worryingly, business expectations for the year ahead stood at their lowest level since October 2020. “The gloomier outlook reflected various factors, including headwinds from the rising cost of living, concerns over energy and food supply amid the Ukraine war, tightening financial conditions, ongoing supply chain shortages, often linked to China’s lockdowns, and a broader diminishing of economic growth prospects”, Markit’s report said

• The services gauge, meanwhile, moved from 56.1 to 52.1, signalling the smallest improvement in business conditions since the Omicron wave of the COVID-19 virus. Incoming new business expanded for a 14th consecutive month, albeit at the slowest pace since January. Contrary to what had been observed in the manufacturing sector, services input price inflation accelerated “in part reflecting the pass-through of prior raw material and energy cost increases to wages.”

• Consumer confidence in the eurozone unexpectedly tumbled to -23.6 points in June, according to an early estimate published by the European Commission. This sentiment reading was near the nadir hit in April 2020, early in the coronavirus pandemic, and likely reflected the effects of soaring inflation. In Germany, the Ifo Institute’s Business Climate Index slipped to 92.3 in June from 93.0 in May, with manufacturers expressing concerns about energy costs

• Germany moved to the second “alarm stage” of its emergency plans to reduce gas consumption and increase storage inventories of the thermal fuel after Russia sharply reduced pipeline flows. Sweden and Denmark joined Germany, Austria, and the Netherlands in implementing measures aimed at countering a supply squeeze and averting winter shortages. In addition, Germany, Austria, and Romania moved to reopen some coal plants for electricity generation

• Shares in Europe snapped three weeks of losses as signs that the economy is slowing cast doubt on whether central banks would seek to increase interest rates aggressively. In local currency terms, the pan-European STOXX Europe 600 Index advanced 2.40%. Major stock indexes were mixed. France’s CAC 40 Index rose 3.24%, while Italy’s FTSE MIB Index gained 1.52%. Germany’s DAX Index, however, was little changed


• Many analysts have lowered their growth forecasts for China after the country’s zero-tolerance approach to the coronavirus led to widespread lockdowns that disrupted economic activity and global supply chains this year. A survey by the European Union Chamber of Commerce in China revealed that 23% of European companies were considering shifting their current or planned investments outside of China due to the country’s coronavirus policy

• An official index that tracks apartment and house sales posted YoY declines for 11 months, the longest losing streak since China created a private property market in the 1990s, according to Bloomberg. The persistent property slump has raised fears that it poses a greater risk to China’s economy than the recent coronavirus lockdowns

• The yuan was marginally firm at CNY 6.69 per U.S. dollar from CNY 6.70 last week. The yield on the 10-year China government bond dipped to 2.81% from 2.83% a week ago after the People’s Bank of China (PBOC) injected seven-day reverse repos totaling CNY 60 billion into the financial system. The PBOC kept its benchmark lending rates unchanged to avoid further divergence in monetary policy as other global central banks have started hiking interest rates to battle inflation. Analysts believe that Beijing is wary of risks that the yuan will depreciate and that capital outflows will accelerate if it reduces rates to support a slowing economy

• Chinese stock markets advanced on stimulus hopes after President Xi Jinping pledged to roll out more measures to support the economy and minimize the impact of COVID-19. The broad, capitalization-weighted Shanghai Composite Index added 1.0% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, rose 1.97%

Sources: T. Rowe Price, MFS Investment Management, National Bank of Canada, Wells Fargo, Handelsbanken Capital Markets, M. Cassar Derjavets