June global manufacturing confidence down slightly due to weak EM

Barclays notes:

Our final reading of the Barclays global manufacturing confidence in June points to a slight decline, to -0.43 from -0.42, lower than our initial estimate , as many EM countries (including India, Korea, Taiwan, Turkey and Mexico) saw softening sentiment relative to last month, while solid expansion in the US and euro area manufacturing sectors provided a significant offset on an aggregate basis. 

In the US, the ISM manufacturing was stronger than expected at  53.6, up 0.2 points from May; however, the components breakdown reveals that the encouraging growth in demand (manufacturing new orders) was counterbalanced by a decline in current production. Nevertheless, both components (which we focus on for the global aggregate) remain solidly in expansion territory and bode well for our expectation for a modest manufacturing rebound in the second half of the year. 

In the euro area, the improvement in headline manufacturing PMI was confirmed at 52.5 (up from 52.2), importantly coming from across the board (excluding Greece); German manufacturing rebounded from last month's decline, and France's index crossed the 50 benchmark for the first time since April 2014 on healthy improvement in production and new orders components. Spain and Italy moderated slightly from peak levels, but remained well above historic averages.

Within developed economies, the points of weakness in June include Japan and the UK. In Japan, the headline PMI manufacturing fell to 50.1 from 50.9, slightly better than the 'flash' estimate but includes a strong decline in new orders (to 49.6 from 50.9). We believe an improvement in IP in the country will improve later this year, but not materially before Q3 . In the UK, headline manufacturing PMI fell to 51.4 from 51.9, the lowest level in more than two years, on weak demand and sales.

Emerging markets sentiment was generally week almost everywhere. In China, the official NBS PMI was unchanged at 50.2 (below expectations) on slow domestic and external demand, as well as subdued employment conditions and deflationary pressures. The headline Markit PMI manufacturing came in at 49.4, slightly below the 'flash' reading. Other EM Asia declined significantly from May: India's headline PMI manufacturing dropped to 51.3 from 52; Korea and Taiwan fell to 46.1 and 46.3 (from 47.8 and 49.3), driven by strong plunges in new orders of 3.5 and 4.8 points to 43.7 and 43.2, respectively - very weak compared with long-term as well as short-term historic averages. 

Altogether, we continue to believe that global manufacturing output should show an improvement in upcoming months, given the strength of the leading DM economies, the apparent signs of growth stabilization in China and brighter outlooks elsewhere in Asia (EM and Japan) for the second half of the year. This is also implied by the solid performance of the services sector, particularly in DM. 

The June reading of global new orders and inventories support this view, as we see continued improvement in demand (global new orders rose to -0.38 from -0.42 in May) alongside additional (albeit moderate) destocking. That being said, the weakness in EM poses a non-negligible downside risk to global growth and the manufacturing sector recovery.