The starting of June was disappointing from economic data perspective. As per reports released on 1st June, Manufacturing PMI across Europe, US and Asia fell during May.
China known as the major consumer for metals and energy has seen manufacturing activity slowing down for second straight month in May. Chinese manufacturing PMI fell to 52.0 in May from 52.9 in April. It is evident that the world's second-biggest economy is slowing marginally but does not point to a sharp slowdown in its vast manufacturing sector. Chinese inflation is still above 5% which may prompt PBoC (People Bank of China) for further monetary tightening. China’s economy has entered a tough period in June, with the drought crisis and power outages. Enduring high inflation pressures and uncertainties in external liquidity also add to the need to combat excessive price gains rather than maintain growth
In Europe, apart from public debt concern from Greece, Portugal, Ireland, Spain and Italy, slowing down of manufacturing activity has a reason for concern. The Inflation in the common area rose to 2.8% above the target rate set by the European central bank. The ECB which has more focus on price stability compared to Bank of England. Fuelled by a spike in energy costs as well as for raw materials, the ECB lifted its benchmark interest rate from 1% to 1.25% with a further quarter-point rise expected over the summer. Rise in rates along with public debt concern may further dampen the manufacturing growth in the common currency area. As per reading of May, EU Manufacturing PMI dropped to 54.6 from 58.0 in April. The fall in the index was the largest since November 2008.
Moving to UK, manufacturing PMI read at 52.1 in May, from a downwardly revised 54.4 in April. Growth in Manufacturing in the UK is the slowest pace in last 20 months. The UK is now witnessing a high level of inflation with CPI slightly below 5%. Inflation expectation are growing in the economy with rise in commodity prices, however the BoE is still very cautious on taking any step towards monetary tightening. UK GDP growth for 1st quarter is expected at 1.8% as per estimates.
In US, the US Institute for Supply Management's manufacturing index also came lower than the previous month, with a May reading of 53.5 compared April's reading of 60.4. Most of the developed market except Australia and Japan has a reading of 50 in their PMI till now, which shows expansion, otherwise contraction. As inflation is heading up, any monetary tightening may hinder expansion of manufacturing sector and may lead to further softening. We do not see any tightening policy further in US and UK for next 2-3 months, but sentiment may build up in the market as ECB set for rate hike in July meeting.
In emerging Asia, most of the economies are witnessing higher inflation and now with manufacturing slowdown. Headline inflation in Asia ex Japan has been rising rapidly since the second half of 2010, reaching a 29-month high of 5.8% in March 2011. While food inflation has been driving headline inflation higher, core inflation pressures have also been elevated, tracking at a high of 3.9% in March 2011. The process of taming inflation will ultimately be damaging to growth. The results seem revealed now. As per recent data Purchasing Managers’ Indices for India, Korea, Taiwan and Singapore all worsened.
In India, the HSBC Markit PMI based on a survey of around 500 companies, fell to 57.5 in May from 58.0 in April. It was the lowest level since it hit 56.8 in January. The decline was less than those of developed market. South Korea manufacturing growth dropped to its slowest pace in six months, with HSBC's PMI falling to 51.2 from 51.7. Taiwan's had a similar drop with the HSBC PMI falling to 54.9 in May from 58.2 in April. In Singapore, the index dropped 1.7 points to 50.8 in May, from 52.5 in April. In Asia pacific, Australian AIG May PMI fell to 47.7, a contraction for 3rd Month. Nine out of the 12 manufacturing sub-sectors recorded declines in activity during the month, with the clothing and footwear sub-sector recording the steepest contraction, followed by the chemical, petroleum & coal products sub-sector.
The result suggest pressure on commodity prices as slow down of demand in industrials such as Copper, Nickel, Lead, Zinc, aluminium and Silver and for energies like Crude oil and natural gas. Another critical factor need to be mentioned is the end of Quantitative easing by the Federal Reserve Bank, US which has been a major driver rise in global commodity prices. Last November, the Fed announced that they would buy an additional $600 billion of long term treasuries ($75 billion each month) pumping liquidity in the market and keeping the market rate of interest at lower levels. These purchases are scheduled to be completed by the end of June which will provide a focal point of speculation about the impact on the prices of a wide range of assets, including commodities.
Ultra-loose monetary conditions are particularly helpful for commodity prices because they minimize the opportunity cost of holding assets that do not pay any interest, while increasing demand for hedges against inflation. Global commodity prices do at least appear to have tracked the increases in the Fed’s holdings of Treasuries since early 2009. The end of the Fed’s Treasury purchases under QE2 may become a major turning point for commodity prices, which may lead to US dollar recovery and pressure on dollar prices commodities.
Commodity prices should ease with demand slowdown along with US dollar recovery after the end of QE 2nd.
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