William John Market Report 24-06-21
William John Market Report 24-06-21Category: Reports
Yesterday, IHS Markit released its Purchasing Managers’ Index (PMI) for the Eurozone economy. Collecting data from 11/06 until 22/06, Eurozone business activity grew at its fastest rate for 15 years in June according to the preliminary ‘flash’ reading.
The IHS Markit Eurozone Composite PMI is a weighted average of the following five indices: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). An increase in the index reflects accelerating economic activity, and the increase in its level from 57.1 in May to 59.2 in June took it to its highest level since 2006.
Manufacturing has been the focal point of accelerating business activity, reporting a 12th successive month of output growth. Additionally, production growth in Germany was the highest in the region, contrasting France which is lagging its fellow member states due to a slower rate of new order growth (lower increased demand). Although the manufacturing sector recorded the strongest pace of growth, the services sector saw the greatest improvement in performance, seeing services business activity accelerating to a pace not seen since 07/07.
However, despite a rapid acceleration in business activity, demand has outstripped supply causing prices charged for goods and services to rise at an unprecedented rate. This is likely an early indicator of further inflationary pressure up the supply chain, with inflation calculated on consumer prices at the end of it.
Such diminished supply capacity included leading firms reporting the largest accumulation of backlogged work since data started to be recorded in 2002. These backlogs across multiple sectors have been complemented by supply shortages for many inputs and inventories of finished goods falling at their sharpest rate since 2009. These depleted inventories are indicative of potentially inflationary supply chain bottlenecks.
Commenting specifically on price levels, average input prices rose at a rate only exceeded once in 09/00. These were attributed to rising wages, higher transport costs, higher fuel costs and higher supplier prices. Noting a comment from Warren Buffett in May, “We are raising prices. People are raising prices to us, and it’s being accepted”.
Overall, the PMI is reassuringly positive. Strong economic growth across multiple sectors in Europe pave the way for a prosperous summer, ceteris paribus, considering inflation has been robustly considered “transitory” from a pre- to post-pandemic economy. Something to bear in mind is the rapid spread of the “Delta” variant of Covid-19 in many countries amongst the unvaccinated population. If the variant spreads quicker than member states’ vaccination programmes, economic progress could be hindered, and inflation could be sustained for a much longer period.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.