01 Jul 2019
Manufacturing PMI falls into negative territory for the first time in six years
72 month sequence of expansion for the Manufacturing sector ends.
The latest AIB Ireland Manufacturing PMI report signals the first deterioration in Irish manufacturing operating conditions since May 2013, with the headline PMI falling marginally below the 50 ‘no change’ line. The headline PMI was 49.8 in June, down from May’s 50.4 reading.
Within the report there was a marked drop in New Orders, which contracted at the fastest pace since January 2012. The report also says that “manufacturers raised their holdings of finished goods at the second-fastest pace in the more than 21 year series history amid hopes of a pick-up in consumer demand in the future”, although we wonder if there is more of a direct connection between the finished goods’ inventory build and tepid New Orders. Brexit uncertainty was said to weigh on client demand, although there were some pockets of growth in areas such as Asia and South America.
On a more encouraging note, employment growth remained in positive territory in June, although the sustainability of this appears in question given the aforementioned trend in orders and weak purchasing activity by manufacturers. Margin trends were unhelpful, with input cost inflation quickening and while manufacturers were able to pass on at least a portion of this increase, the latest uptick in output prices was marginal.
Sentiment among Irish manufacturers dropped to the weakest in 34 months as Brexit uncertainty weighed on optimism. Nonetheless, firms continue to predict output growth over the coming year.
This report brings an end to the 72 month sequence of expansion for the Manufacturing sector in Ireland and also the 69 months of simultaneous growth that had been recorded across all three Irish PMIs – Construction, Manufacturing and Services. While this is an unwelcome milestone, we note that panellists remain optimistic on the outlook although, as we have said repeatedly, short-term political developments in Westminster and Washington have the potential to move the dial for Ireland’s hyper-globalised economy.
Irish REITs: CBRE’s musings on the property market
CBRE has released its latest bi-monthly note on the Irish property market. The agents hail a strong first half performance and predict a busy H2 outturn.
While the economic outlook has become more unsettled, it remains positive (overall), which has helpful implications for the commercial property market. Recent moves in yields bode well for capital values.
In the office space, demand remains buoyant with 370,000 sq m of active requirements. While this will be skewed towards the Dublin market, “there has been evidence of increased appetite for offices in regional cities over recent months”, which chimes with our analysis. Care must be taken in interpreting H1 take-up figures, however, as a number of large transactions agreed during the period won’t complete until Q3. Prime rents are stable at c. €65 psf in Dublin’s CBD.
Elsewhere demand for well-located industrial stock remains elevated, with good interest from logistics, F&B, Ecommerce and data centre tenants. There is ongoing growth in speculative developments in this segment given the combination of rising rents and buoyant demand. The underlying performance of Retailers remains positive here (in contrast to many other jurisdictions), helped by rising employment and wages. CBRE says that there will be “some interesting announcements” in relation to take-up during H2.
In all, the CBRE report paints a bright picture of developments in the commercial property market in Ireland.
UK this week
In the UK, Brexit developments remain the key determinant of UK market sentiment. Though the Tory leadership contest has dominated headlines in recent weeks, it may well be side-lined by attempts to prevent the next Prime Minister from taking the UK out of the EU without a deal. Conservative MP Dominic Grieve has teamed up with Labour’s Margaret Beckett to put forward an amendment to legislation on Tuesday which, if passed, would see funding for Whitehall departments withheld in the event of a no-deal without parliament’s approval. Whether this will be successful remains to be seen; previous parliamentary efforts to block a no-deal Brexit have been close but have failed to get over the line, but we note that the government’s parliamentary majority now stands at just four following the successful recall petition against Conservative Brecon and Radnorshire MP Christopher Davies.
Aside from Brexit, data releases include the manufacturing and services PMI for June on Monday and Wednesday, for which we look for a steady 49.4 and 0.4pt rise to 51.4 respectively. Also set to be published is house price data from both Nationwide Building Society and Halifax. Finally, note that we are set to hear from Bank of England Deputy Governors Ben Broadbent and Jon Cunliffe who will both speak on Wednesday morning.
US this week
A key focus for markets will be the US jobs report on Friday after Fed Chair Jerome Powell indicated that the FOMC would be watching to see whether payrolls rebounded in June from their measly +75k rise in May. We look for a rise of 130k to be accompanied by a steady unemployment rate of 3.6%. As ever markets will look to the ADP print on Wednesday for an indication of what to expect. Other US data includes the ISM manufacturing (Mon) and non-manufacturing (Wed) indices as well as trade figures (Wed). Note also that US markets are closed on Thursday for Independence Day (Jul 4), with the regular weekly jobless claims release brought forward a day to Wednesday as a result.
Europe & ROW this week
Over in Brussels, EU leaders are set to meet on Sunday in an effort to try to agree candidates for the top positions before the new intake of MEPs take their seats on Tuesday. Meanwhile, the data calendar is relatively sparse, with the final PMIs for June spread across Monday and Wednesday before German manufacturing orders caps off the week on Friday.
Asian markets have opened with a disappointing manufacturing PMI falling to a 5 month low of 49.4. Further Caixin PMIs are due later in the week, which will be closely watched for signs of what impact the trade dispute is having on the world’s second biggest economy. Furthermore, the Reserve Bank of Australia (RBA) is due to announce its policy decision on Tuesday, for which there is a live possibility that the cash rate will be cut by 25bps to 1.00%. The decision looks finely balanced, but we suspect that if the RBA does not lower rates at next week’s meeting, then it is likely to do so in August.
09.00 EU Manufacturing PMI
09.30 UK Manufacturing PMI
14.45 US Manufacturing PMI