U.S. Manufacturing Logs Another Strong Month, Europe Not So Much
- The ISM Manufacturing Index for June ticked down to a still-strong 55.3 percent.
- The Pending Home Sales Index for May increased by 6.1 percent.
- May Construction Spending increased by 0.1 percent, as private residential projects dipped.
The U.S. manufacturing sector remains healthy, contributing to a rebound from weak first quarter GDP. The ISM manufacturing index eased slightly to a still-strong reading of 55.3 percent. A key manufacturing index for the Eurozone dipped closer to the break-even point in May. Meanwhile the British manufacturing purchasing managers’ index showed strong gains through the second quarter, highlighting the variable speed economic expansion framing the Atlantic. The Pacific Rim looks a little steadier as China registered the highest level in its key manufacturing index this year. The Chinese “mini-stimulus” package appears to be gaining traction. Japan showed a drop in business confidence in the second quarter, in reaction to the consumption tax increases that came as part of Prime Minister Abe’s “third arrow.”
As the world’s major economic blocks transition from post-crisis fire control, toward something that will eventually approximate normal, central bank policy is un-synchronizing. This is clearly visible across the Atlantic. The Bank of England has been discussing interest rate increases. The Federal Reserve is still unwinding QE in measured steps and appears to be about a year away from interest rate hikes. The European Central Bank is stepping harder on the monetary accelerator through negative interest rates and other measures to stimulate bank lending. We may also see the Fed and Bank of Japan moving in opposite directions, as the Fed pivots next year while the BOJ maintains aggressive QE.
Foreign exchange rates are responding to the monetary policy decoupling. The British pound is at its highest level against the euro since late 2008. The dollar, too, has strengthened against the euro. Dollar/Yen has been relatively stable this year after the yen devalued significantly through 2013, but could see additional downward pressure on the yen next year. As the Federal Reserve winds down its asset purchase program late this year, foreign central bank purchases of U.S. Treasurys may also dial down, amplifying the drop in demand from the Fed, and putting upward pressure on U.S. interest rates and shifting spreads on sovereign bonds globally.
The National Association of Realtors Pending Home Sales Index increased by 6.1 percent in May, hitting its strongest level since September 2013. This report suggests that gains to May new and existing home sales will hold up into June. The total value of construction put in place in May increased slightly, up by 0.1 percent, as residential construction eased.
Market Reaction: U.S. equity prices are climbing. The yield on 10-Year Treasury bonds is up to 2.56 percent. NYMEX crude oil is down to $105.07/barrel. Natural gas futures are down to $4.43/mmbtu.
For a PDF version of this Comerica Economic Alert click here: ISM-MF 07-01-14.