Global Daily – Global growth still robust

by: Nick Kounis

Global Macro: Manufacturing upswing continues – The momentum in the global economy remains strong, according to the most recent manufacturing survey releases. The bellwether US ISM manufacturing index surged to 57.8 in June, from 54.9 in May. This takes it above the peak seen in February (57.7) and therefore reverses the recent decline in the index. New orders were particularly buoyant (63.5 vs 59.5), while the employment index also jumped (57.2 from 53.5). The latter supports other indicators suggesting that nonfarm employment growth likely rebounded last month (data to be published on Friday).  Meanwhile, the manufacturing PMI rose in June in the eurozone (57.4 vs 57 in May), China (both measures) and Japan. The UK was one of the exceptions in this regard (see below). We expect global growth to remain robust. Financial conditions remain very accommodative and this will likely remain the case given that weak inflationary pressures will allow central banks to move to the exit gradually. In addition, the global investment and inventory cycles remain supportive. (Nick Kounis)

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UK Macro: PMI consistent with BoE holding firm – The UK manufacturing PMI fell to 54.3 in June from 56.3 in May. This adds to signs of slowing momentum in the economy, following the slowdown in GDP growth to 0.2% qoq in Q1 from 0.7% in Q4. The UK services PMI already saw a slowdown in May (June data to be published on Wednesday). The PMIs suggest GDP growth firmed in Q2 but will likely soften again in Q3. The manufacturing PMI also suggested that inflationary pressures are easing, with the input price index coming down sharply. We stick to our view that the BoE will keep policy on hold in the coming months, despite the recent hawkish commentary from Governor Carney. Although inflation has shot through the central bank’s medium term target, it  is entirely due to weakness in sterling. Exchange rate movements tend to have a transitory effect on inflation, unless inflation expectations or wage growth take off. Neither looks to be happening and we think that will remain the case going forward given the softening economic momentum. Finally, the uncertainty related to the outcome of the Brexit negotiations could lead to corporate caution, so risks to economic growth are to the downside. (Nick Kounis)