PMI Data Is In And Surprises On The Upside In Europe And UK But Below Expectations In The USA

The Axiom Update.

The UK economy’s recovery from recession unexpectedly gathered pace at the start of the second quarter as private-sector firms reported the strongest growth in almost a year. S&P Global’s purchasing managers’ index rose to a stronger-than-expected 54 in April, an 11-month high and a jump from 52.8 the previous month. The figure was much stronger than the 52.6 expected by economists, with any score above 50 signalling growth. The figures may heighten concerns among Bank of England hawks that a stronger economy and rapid wage growth mean that the battle to curb inflation pressures is not over, even with the headline rate close to falling to the 2% target.

Meanwhile the same data for the Eurozone showed purchasing managers’ index increased to 51.4 in April, stronger than the 50.7 predicted by economists and above the 50 level that indicates expansion for a second month. Germany was above that key mark for the first time since June, defying analysts who had expected another sub-par reading. German private-sector activity grew for the first time in 10 months, driven by services. Manufacturing continued to shrink, though at a slower pace than the month before.

Finally, US business activity expanded in April at the slowest pace this year on a pullback in demand that led to the first decline in employment since 2020. The S&P Global flash April composite index of output at manufacturers and service providers slipped 1.2 points, the most since August, to 50.9. The composite measure of orders showed the first contraction in six months.

Analysis:

Markets have pushed back bets on the start of the BOE’s hiking cycle in recent weeks after fears the UK will suffer a resurgence in price pressures similar to those seen in the US. Investors are fully pricing in the first reduction in borrowing costs for the August meeting, followed by one more cut by the end of the year.

Traders have built up bets that the US Federal Reserve could raise interest rates again, a once-unthinkable prospect that highlights a shift in market expectations after stronger than expected US economic data and hawkish comments from policymakers. Options markets now suggest a roughly one in five chance of a US rate increase within the next 12 months, up sharply from the start of the year, according to analysts.

Commentary:

“While the improving economic recovery picture in the UK is welcome news, the upward pressure on inflation will add to concerns that a sustainable path to below target inflation has not yet been achieved,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “The upturn in costs alongside solid demand suggests firms may seek to raise prices in the coming months.”

“The US economic activity lost momentum at the start of the second quarter,” Williamson said in a statement. “April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook. The more challenging business environment prompted companies to cut payroll numbers at a rate not seen since the global financial crisis if the early pandemic lockdown months are excluded,”