The red-hot global manufacturing sector shows no sign of cooling down. The US ISM beat expectations this week and increased from 60.7 in April to 61.2 in May. New orders also increased and supplier deliveries are at the highest level since 1974; a clear sign overheating is not easing up yet. In China, Caixin PMI which focuses on smaller firms, increased slightly to 52.0 in May from 51.9 as domestic and export demand picked up. Firms continue to struggle with increasing raw material costs as a sub-index for input costs stood at a 13 year high in Korea and the highest since 2016 in China. Overall the numbers fit with our expectations that overheating will be with us for the summer but should ease up during h2.
Some Fed members are starting to flag the need to start discussing tapering of its QE programme. The Fed’s Patrick Harker said on Wednesday that “it may be time to at least think about thinking about tapering”. He added, though, that “we will remove accommodation carefully and methodically as the economy continues to strengthen…Our goal here is to be boring.” He is the third member to suggest that the tapering discussion is likely to come up soon after similar comments from the more influential member Fed Vice Chairman Richard Clarida as well as FOMC Board member Randal Quarles. Despite the comments the Fed has so far succeeded in being boring as bond yields have reacted little to the twist in comments. US 10-year yields drifted lower again yesterday.
The ECB will also begin signalling less aggressive bond buying at next Thursday’s meeting. The ECB is expected to raise its growth projections by 0.3pp for this year and next year. We expect ECB’s PEPP purchase guidance to shift from ‘significantly’ to ‘moderately’ higher than at the start of the year, i.e. we expect PEPP buying to be EUR70bn/ month in Q3 versus the current net purchase pace of EUR80bn/month.
Oil prices rises to the highest level in two years. This week OPEC+ stuck to the current plan of gradually normalising oil output. This led to Brent rising to just below USD72/bbl, as the market seems more concerned about risk of tight oil market in coming months than OPEC normalising output too fast. It follows a period of moving broadly sideways since March but demand is now about to pick up with travelling going up over the summer. Industrial metals continue to take a break from the strong rally, though, as copper and aluminium prices drift lower.
Apart from the ECB meeting, several economic releases will get attention next week. The US CPI on Thursday is very interesting; are we going to see another jump in some prices? As in past months, due to base effects, we should focus on % m/m price changes. Also on Thursday, the German ZEW for June is due and may show some stabilisation in the expectations amid signs of peak in manufacturing, but overall should still paint an upbeat picture. Current economic situation assessment still has some catch-up to do. The last German state election before federal election in September takes place on Sunday (6 June) in Sachsen-Anhalt. Will be very much seen as a bell-weather for the September vote, especially how battered CDU is performing. Another bad performance as in the state elections in March will increase the heat on Armin Laschet and his chancellor ambitions.
