Manufacturing continues to contract in the US and Eurozone, with China maintaining consistent expansion
The US ISM Manufacturing Index continued in contraction territory in June (below the 50-level), registering 48.5, down from 48.7 in May, constituting the third consecutive month of contraction following growth in March. Timothy R. Fiore, Chair of the Institute for Supply Management, commented, “U.S. manufacturing activity continued in contraction at the close of the second quarter. Demand was weak again, output declined, and inputs stayed accommodative.” The new orders subindex rose the most in June, increasing by 3.9 percentage points (p.p.) m-o-m to 49.3. However, prices continued to fall in June, decreasing by 4.9 p.p. to 52.1. Meanwhile, imports fell into contraction territory, declining by 2.6 p.p. to 48.5.
The Eurozone Manufacturing Purchasing Managers’ Index fell to 45.8 in June, down from 47.3 in May, representing two years of continued contraction in manufacturing activity in the region. Sources noted that manufacturers continue to lower prices, failing to spur demand in the region. For instance, new orders and export orders declined, with the latter recording the 28th month of contraction.
The Chinese Caixin manufacturing PMI rose to 51.8 in June, edging up from 51.7 in May, marking the eighth consecutive month of expansion. The June figure beat market sources’ expectations of 51.2. Of note in the June data release was strength within the orders subindex, while market players note rising production costs, due to elevated prices of metals, energy, and freight. As such, the input subindex also increased in June.
Inflation cools in the US and the Eurozone, with more rate cuts on the horizon
Inflation in the US was 3.0% y-o-y in June, down from 3.3% y-o-y in May, representing the first m-o-m decline since May 2020. The headline result was slightly below market forecasts of 3.1% y-o-y. Food inflation has decelerated markedly over the past two years but rose 0.2% m-o-m in June, resulting in a 2.2% annualized increase, up from 2.1% in May. The transportation index remains stubbornly elevated; however, in June, this index fell to 9.4% y-o-y, down from 10.5% y-o-y in May. Energy inflation registered a 2.0% m-o-m fall, representing a 1.0% y-o-y increase, declining from last month’s annualized figure. Although no rate cuts have taken place in the US, Federal Reserve Chairman Jerome Powell recently stated that the Federal Reserve will not necessarily wait until inflation falls to 2.0% y-o-y, with market sources anticipating a 25 basis point (bp) cut in September.
Annualized inflation in the Eurozone was 2.5% y-o-y in June, down from 2.6% y-o-y in May. Annualized declines were observed in the food, alcohol, tobacco and energy subindices, which fell by 2.4% y-o-y and 0.2% y-o-y, respectively. However, the services subindex showed the greatest m-o-m increase, rising by 0.6%. Annualized services inflation was unchanged at 4.1% in June compared to May, remaining the most elevated of all the subindices. In July, the European Central Bank (ECB) left rates unchanged following the 25 bps cut in June. However, ECB President Christine Lagarde stated that the central bank may cut rates again in September.
The consumer price index in China was 0.2% y-o-y in June, decelerating slightly from 0.3% y-o-y in May. The result constitutes the fifth consecutive month of inflation after a period of deflation. The June result was lower than the expectations of market sources, who had anticipated an annualized figure of 0.4%. While demand remains generally sluggish, players pointed to declining food prices as a major factor for the failure to meet the 0.4% result. In an unexpected move, the People’s Bank of China cut the one- and five-year loan prime rates by 10 bps each, to 3.35% and 3.85%, respectively. Market sources expect further economic stimulus in the coming months following a meeting of the Central Committee, to address weak domestic demand and a persistent slowdown in the property market.
Steel-consuming industries show a decline in the EU and the US
The construction confidence indicator in the EU remained negative and was -5 points throughout Q2 2024, indicating persistently negative expectations. The number of new building permits continues to decline, reflecting sluggish forecasts for residential construction: the index fell by 8% y-o-y in France in May; a 14% y-o-y decline was recorded in Portugal; in the EU there is only data for Q1 2024, which shows an 8% y-o-y fall. According to the updated forecasts of the European Steel Association (EUROFER), steel consumption in construction will continue to fall y-o-y until the end of the year, and a possible recovery of the sector will only start from Q1 2025.
Residential construction in the US is experiencing a downturn in demand as the number of new homes for sale has been rising steadily since H2 2023 and in May was at the highest level in 14 years. The number of building permits from H1 2024 increased by only 1% y-o-y. The cost of construction materials grew, reflected by high real estate prices and constrained demand, as total construction spending in the US grew by 20% y-o-y in May, and the growth trend in construction spending started in November 2023.
The automotive industry in the EU continued to show poor results in May. In April and May, new car registrations were stable. However, the May figure was 3% lower y-o-y. If we look at the total since the beginning of the year, though, new car registrations grew by 4.5% y-o-y in the first five months of 2024. The basis of the growth was the sales of electric cars and imported cars. As a result, production of motor vehicles in the EU in May fell by 14% y-o-y, and by 8.4% y-o-y for the first five months of 2024. The European Steel Association (EUROFER) believes that the peak production has already been passed in 2023 and that in H2 2024, the figure will continue to decline. Accordingly, the need for other materials used in the industry in Europe is likely to decrease.
Total vehicle sales in the US fell by 4% m-o-m and 5% y-o-y in June; new car sales fell by 7% m-o-m and 3% y-o-y. The market is experiencing seasonally weak demand, and market sources believe that weak demand will continue until at least the end of summer. The upcoming US presidential election is also a significant deterrent to buyer activity, as the degree of uncertainty in the economy is increasing. Car manufacturers have reduced production by 12% y-o-y for the first four months of 2024. This impacted motor car manufacturers, and accordingly, the consumption of goods used in the automotive industry is also decreasing.
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Written by Nick Wood
