What do the latest PMI surveys suggest about the global economic recovery?

On the latest edition of Market Week in Review, Director of Investment Strategies Shailesh Kshatriya and Julie Zhang, head of North America sales enablement and analytics, discussed U.S. Federal Reserve (the Fed) Chair Jerome Powell’s recent testimony to Congress. They also unpacked the latest trends in the housing market and reviewed flash PMI (purchasing managers’ index) surveys from June.

Markets rise as Powell reiterates patient approach 

Fresh off the heels of the Fed’s pivot to a more hawkish stance, Kshatriya noted that Chairman Jerome Powell appeared to walk back some of the rhetoric from the central bank’s policy meeting during testimony before the House Select Subcommittee on the Coronavirus Crisis. “Powell looked to be trying to soften the blow from the Fed meeting a bit, reiterating that he strongly believes the recent spike in inflation will prove to be temporary—and that it shouldn’t cause the central bank to raise interest rates too quickly,” he remarked.

One of the key takeaways from the chairman’s testimony, Kshatriya said, is that the Fed is still willing to be very patient and keep its easy-money policies in place for now, despite the recent upgrades to its growth and inflation outlooks. U.S. equity markets took comfort in Powell’s remarks, he noted, with both the S&P 500® Index and the Nasdaq Composite Index setting new record highs the week of June 21. “The Fed has repeatedly stressed lately that it will provide plenty of advance notice prior to any changes in monetary policy, and this is something that’s also helped sooth recent market jitters,” Kshatriya noted.

He added that it’s important to understand that in order for the Fed to ultimately raise rates, the central bank first has to taper its monthly pace of asset purchases and bring its quantitative-easing program to an end. “Changing monetary policy is a two-step process,” Kshatriya explained, “and the focus for the next few months will center around the Fed’s timeline for tapering.”

Affordability, high demand trigger slowdown in sales of U.S. homes

Switching to the sizzling housing market, Kshatriya characterized the rapid increase in home prices over the past year as an interesting phenomenon impacting much of the globe. As prices continue to soar, affordability has become more and more of a challenge, he noted, explaining that this is one of the reasons why sales of both new and existing U.S. homes fell during May, according to a report from the National Association of Realtors.

“The report showed that existing-home sales dropped by 0.9% on a month-over-month basis, while new-home sales plummeted by 5.9%, continuing the recent slowdown in U.S. home-sales activity,” Kshatriya said. The softening can also be attributed to an uptick in housing demand, driven by the need for more space amid the pandemic, he said. This, in turn, has made inventories rather lean, Kshatriya explained.

Importantly, he stressed that the current weakness in home-sales activity is not a reflection of the U.S. economy. “The nation’s economy continues to perform quite well, and remains on solid footing,” Kshatriya stated.

Eurozone composite PMI hits 15-year high

New flash PMI numbers for June, recently released by IHS Markit, confirm the strength of the U.S. economy, in addition to that of several other key regions, Kshatriya noted. “The U.S. composite PMI, which covers both the manufacturing and services sectors, came in at a level of 63.9—which, although down slightly from May, is still very healthy,” he stated. Kshatriya explained that a reading above 50 indicates expansionary conditions, with a reading below 50 pointing to contractionary conditions. “I consider anything above 60 to be indicative of an exceptional pace of expansion,” he noted.

The composite PMI for the UK also came in very strong, at 61.8, while Australia registered a reading of 56.1. Similar to the U.S., both of these numbers were a little lower than what was observed in May, but still point to near-record economic expansion, Kshatriya said. Meanwhile, the eurozone’s preliminary composite PMI rose to 59.2 in June—the fastest pace of expansion for the region in 15 years, he noted.

The one exception among key geographic regions, Kshatriya said, was Japan, where the composite PMI declined to 47.8. However, he explained that the report from IHS Markit noted that Japanese businesses are becoming more optimistic about the country’s pace of vaccinations, and therefore, the economic outlook at large. “With this in mind, I believe we’ll start to see the composite PMI improve more meaningfully in Japan soon, perhaps climbing above 50 in the next few months,” Kshatriya concluded.

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