Euro area and US PMIs surprise to the upside

In focus today

From the US, April durable goods orders and revised May Michigan consumer sentiment survey are due for release. The flash release showed consumers' inflation expectations ticking notably higher, but the recent decline in retail gasoline prices could mean that expected inflation has also moved lower. The Fed's Waller (voter) will be on the wires in the afternoon, his views have often reflected broader consensus among the FOMC participants.

Swedish PPI for the month of April is published today. In March, the import price index's seasonally adjusted three-month rate turned positive again (albeit very mildly). Sweden therefore no longer import deflation at the producer level. Meanwhile, the Riksbank is currently (23-24/5) hosting a high-level academic conference on inflation targeting, with speakers such as Olivier Blanchard and Mervyn King on today's agenda. The conference can be streamed via the following link.

Economic and market news

What happened overnight

In Japan, inflation slowed further in April, with headline CPI in at 2.5% y/y (prior: 2.7%) and core inflation at 2.2% (cons: 2.2%, prior: 2.6%), in line with consensus expectations. This will make the Bank of Japan (BoJ) more cautious about future rate hikes. However, we still await the effects from the wage hikes at 5.25%, which Japanese firms agreed to earlier this spring.

What happened yesterday

Euro area PMI rose slightly more than expected in May to 52.3 (cons: 52.0, prior: 51.7). Services PMI was unchanged at 53.3 in contrast to expectation of a rise (cons: 53.6, prior: 53.3) while manufacturing PMI rose more than expected to 47.4 (cons: 46.1, prior: 45.7). With the composite PMI above 50 for three consecutive months the momentum is gathering in the euro area economy. The increase in manufacturing PMIs was driven especially by rising new orders. Most importantly, the service sector price index ticked down in both output and inputs costs, meaning it is at the lowest level in three years, but still above the historical average. This is good news for the ECB, but risks nevertheless persist as the employment index continued to rise in May and activity is gathering momentum.

Euro area wage growth picked up in Q1 rising to 4.69% y/y from 4.49% in Q4. Hence, the wage pressure in the euro area economy is still substantial. This leaves upside risks to the inflation outlook especially on services inflation due to a relatively larger role of wages. Especially domestically driven services inflation has been a key concern for the ECB lately in their communication. With high wage growth the upside risks to inflation thereby persists as the labour market is also tight.

In the US, flash PMIs surprised to the upside as well, driven especially by stronger services activity. Composite index remains firmly in 'growth territory'. Output price indices (key measures of inflation pressure) remain mostly unchanged, services 54.0 (from 53.7) and manufacturing 54.5 (from 54.7) - close to long-term averages.

In the UK, preliminary PMIs surprised to the downside. Manufacturing measure rose into expansionary territory at 51.3 (from 49.1) as the manufacturing sector continues to recover. Services and the composite measure remain above 50 but drop to 52.9 (from 54.7) and 52.8 (from 54.0) respectively. Businesses reported the softest increase in average selling prices for over three years and private sector firms continue to increase prices at a slower rate. Overall, good news for the BoE on track for a summer cut with growth pick-up up after a technical recession in H2 and survey signals point to price pressures easing.

The Central Bank of Turkey kept its policy rate unchanged at 50% as widely expected. The monetary policy statement was also broadly unchanged. The committee continues to highlight that the tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range. The central bank expects disinflation will be established in the second half of 2024.