Proactive Investors –
- drops 35 points to 8,132
- easyJet (LON:) profits jump 16%, summer bookings solid
- Reckitt Benckiser (LON:) to sell Air Wick, Cillit Bang and Calgon brands
BoE should be reassured by PMI
The UK flash PMI may help to reassure the Bank of England that it can , says economist Ashley Webb at Capital Economics, but likely not til September.
Some of the recent rebound in economic activity “may have been due to catch-up growth following the weakness of activity last year”, he says, with “easing towards a more normal rate”.
The small rise in the composite PMI is consistent with GDP growth slowing to around 0.2% quarter-on-quarter at the start of Q3 after what is looking like a solid rise of around 0.6% or 0.7% in Q2, Webb says.
The manufacturing output balance points to actual manufacturing output growth picking up from what was a negative period in May to around around 0.6% growth in July, while services PMI is consistent with actual non-retail services output growth easing from 1.0% in May to 0.4%.
“Given the lingering concerns around the persistence of services inflation, the fall in the services prices balance will give the Bank of England some reassurance that services inflation will continue to ease in the coming months,” Webb says.
With the BoE focusing on services inflation, he notes the decline in the PMI services output prices balance to its lowest level since February 2021, is consistent with services inflation easing from 5.7% in June to around 4.0%.
“Admittedly, the recent rise in shipping costs meant that the manufacturing input prices balance rose from 56.3 to an 18-month high of 57.9. But overall today’s data release may help to reassure the Bank that it can cut interest rates from 5.25% to 5.00% in September.”
ECB rate cut in September ‘remains likely’
The earlier eurozone PMI survey, where activity was particularly weak in and fell sharply in Germany, “offers little further clarity on the ECB’s move in September” says Franziska Palmas at Capital Economics.
Indicators of price pressures were mixed, with the euro-zone input price index rose significantly, while output price pressures in services, which the ECB has been paying particular attention to, also edged down but the prices charged index remained above its long run average.
“Overall, the survey offers little further clarity on the ECB’s move in September, with the combination of a weakening economy and still high price pressures offering some support for both the hawks and the doves on the ECB’s Governing Council.
“On balance though, we still think a cut in September is more likely,” she says.
UK PMI shows optimism improved since election
“The flash PMI survey data for July signal an encouraging start to the second half of the year, with output, order books and employment all growing at faster rates amid rebounding business confidence, while price pressures moderated,” says Chris Williamson, chief business economist at S&P Global.
As the first post-election business survey, collected between 11 and 22 July, the PMI data “paints a welcoming picture for the new government”, he adds, as manufacturing and services companies expressed improved optimism about the future, reporting a improved surge in demand and taking on more staff.
With prices rising at their lowest rate for three and a half years, he suggests this may add to confidence of a summer rate cut from the Bank of England.
“However, policymakers will likely take a cautious approach to loosening policy amid signs of inflationary pressures pivoting away from services towards manufacturing, where Red Sea shipping delays and higher freight prices are adding to costs again.
“The renewed hiring trend could also add to pay pressures, sustaining some stickiness of inflation in the coming months,” Williamson says.
UK economy improving, flash PMI shows
The UK flash purchasing managers’ index (PMI) inched up to 52.7 for July from 52.3 in June, says S&P Global, above the average forecast of 52.6.
again outdid services, with the flash UK manufacturing output index rising to a 29-month high of 54.4 from June’s 53.3, higher than forecast.
The activity index rose to 52.4 from 52.1, less than expected.
This preliminary PMI survey indicates the ninth monthly expansion in economic putout in a row, with the full July report due at the start of next month.
Inflation slowed to its lowest in three and a half years, based on average prices charged, but S&P Global said the pace “remained steep due to elevated costs”, as manufacturing firms faced the strongest rise in costs in one-and-a-half years due to freight challenges linked to the Red Sea attacks.
Earlier, the euro-zone composite PMI dropped for the second consecutive month, to 50.1 in July from 50.9 in June, was weaker than the consensus forecast of 51.1.
Both the manufacturing output PMI and the services PMI fell, with activity particularly weak in manufacturing.
The composite PMI fell sharply in Germany, returning to contractionary sub-50 levels, below France and the rest of the euro area.
Investory generally underwhelmed
With results season getting into its stride on both sides of the Atlantic, “so far, investors are underwhelmed by what they have seen”, sums up Steve Clayton, head of equity funds at Hargreaves Lansdown (LON:).
He says investors gave the thumbs-down to figures from Alphabet (NASDAQ:), Tesla and Visa (NYSE:), while the pound eased back to $1.289 “in the face of a dollar that is making gains against all major currencies presently as investors reassess the US political outlook”.
London’s oil supermajors are little changed as the Middle East situation seems not any closer to change, meaning are holding steady around $81.44, having slipped back from $87 at the start of the month.
“If last night’s news was any guide, 2024 could be the year when markets start to talk about the So-So Seven” instead of the Magnificant Seven, says Clayton, “because what we saw from Tesla and Alphabet was just not enough to keep momentum in their stocks.
“AI has been such a driver of expectations and has led to an extraordinary surge in revenues for Nvidia (NASDAQ:) as the hyperscalers like Google, Amazon (NASDAQ:) and Microsoft’s cloud units race to build capacity.
“But at some point, that scale has to start delivering returns on capital and, so far, the jury is out.”
As for Tesla, Clayton says it is “simply struggling to turn rising output into earnings”.
