The country’s borrowing costs rose further over the past week and the Spanish central bank reported that almost €100 billion of deposits left the country in Q1 - an amount equal to around 10% of the country’s GDP. The key issue remains its banking sector, with many suggesting it needs a bailout. Meanwhile the latest US jobs figure was disappointing. And on top of that, conditions continue to worsen at home with the latest manufacturing survey pointing to a sharp drop in activity during May. With the Bank of England due to meet next Thursday, it’s likely that many members of the Monetary Policy Committee will return from the Jubilee weekend to vote in favour of more quantitative easing.
UK manufacturing Purchasing Managers’ Index (PMI) collapses in May
The headline index fell from 50.2 in April to 45.9 in May, which is the second steepest m/m decline in the survey's 20-year history (a reading below 50 signals contraction). The 'new orders' component fell to its lowest level since March 2009, due to client de-stocking and postponed spending - partly in anticipation of lower prices in future. New export orders fell, but only slightly, which implies that it is domestic demand that was particularly weak. Job losses were reported for the first time in five months, but were relatively modest. The only bright spot for manufacturers was a decline in cost inflation, reflecting a fall in commodity prices and the effect of a stronger pound on import prices. Overall, a truly dire set of data that we think will probably prompt the MPC to extend QE next week.
Gilt yields push record lows
Increasing risks coming from Spain and Italy, followed by dismal PMI data, all conspired to push gilt yields lower. Yields on 10 year UK government debt fell from 1.75% at the end of last week to trade at 1.45% during Friday. This reflects investors preferring the UK as a safer home for their money, but it also reflects the UK's economic prospects. With nervousness rising and measures of business confidence falling it makes meaningful recovery even more difficult to achieve. Concern over the global growth outlook is also pushing oil lower. Brent crude fell below $100 for the first time since last October. The plus point here is for UK motorists and could help to bring down inflation further.
The Irish referendum points to being ‘yes’
Ireland yesterday held a referendum on the fiscal compact (a package of measures to strengthen oversight of government spending among Eurozone members). The result is not expected until later today but a ‘yes’ vote looks to be the outcome. However, this is just the first of two key votes in the Eurozone with Greeks voting for a new government on the 17th June. The outcome of the Greek election will go a long way to determining the future policy response to the ongoing crisis and will significantly influence whether Greece remains in the Eurozone or not. A less than emphatic ‘yes’ vote will likely encourage disgruntlement among many parts of the Eurozone with regard to the current policy approach of Brussels and Berlin.
US labour market continues to weaken
A paltry 69,000 increase in non-farm payroll numbers for May was less than half of the 150,000 expected by markets and well below the average monthly gain of 226,000 in Q1. The unemployment rate rose slightly to 8.2%, from 8.1% in April. The level of job creation in the US has now fallen for the fifth consecutive month as the robust employment growth over the first quarter has lost its momentum. The weak payrolls added to a downward revision to GDP growth in Q1. The economy grew just 1.9% y/y instead of the 2.2% originally estimated as consumer spending was slightly weaker than first thought and government spending cuts turned out to be higher. The manufacturing PMI equivalent survey for the US also pointed to a slight softening of growth to round off a week of disappointing data.
China (and India) continue to struggle
Last week’s lower manufacturing PMI reading for China was confirmed by an alternative survey. The government version of the PMI fell to 50.4, which is the lowest reading this year. The country’s Prime Minister recently announced a new emphasis on boosting growth with a raft of measures. For the global economy, these measures can’t come soon enough. And China is not the only Asian economy currently suffering from lower growth than what they have been accustomed to. India’s GDP in Q1 fell to just 5.3% y/y - the slowest pace since 2008.