On Thursday, the BOE made an interesting remark in the statement accompanying the announcement to hold rates unchanged. It said that the tariff shock on the economy might be smaller than initially expected. This joins a series of comments from central bankers and economists about the unexpected results of the trade war impact.
Previously, BOE officials such as Megan Green observed that the trade war might reduce consumer prices. This idea was subsequently echoed by BOE President Christine Lagarde. With the US economy now surging ahead after the shock of tariffs being applied, some revision of the conventional wisdom around tariffs might be warranted.
A Closer Look at the Data
The surveys of purchasing managers that make up the PMIs often provide some leading insight into how the economy is going. They are often the first to see changes in trends, particularly around tariffs. If purchasing managers see higher prices, for example, it could be a sign that inflation is finally making its way into the economy.
A steady upward trend in PMIs could mean growing optimism among businesses, and suggest the economy will grow faster than economists might be projecting. Given the concerns about a global economic slowdown in the midst of a trade war impact, improving PMIs could be a sign that the economy is doing better than expected. This could mean the recent flows in currencies towards safe havens could reverse. That is, if traders become convinced that the worries about the effects of the trade are worse than the reality that is slowly coming into perspective.
What to Look Out For
Monday sees the release of partial (or flash) results from the June survey. This is the freshest look at the economic situation, and can include some of the effects from the Iran-Israel war as well. As the clock ticks down to the deadline on “reciprocal” US tariffs, traders are likely looking for signs of whether the economy will power through or start to falter.
German Flash June Manufacturing PMI is expected to continue its recovery and jump to 49.5 from 48.3 prior. That’s still not above the 50 level that separates expansion from contraction. But the largest economy in Europe is seeing persistent optimism with increased government spending on defense. With the “sick man of Europe” recovering, it might be a sign that the ECB has made the right choice to slow down or even end rate cuts.
The Big Movers
Euro Area manufacturing PMI is expected to return to expansion for the first time since the pandemic, jumping to 50.4 from 49.4 in May. The gains are seen being led by German results and supported by recent easing in interest rates.
UK composite PMI is expected to be practically unchanged at 50.4 compared to 50.3 prior as the British economy treads water amidst higher energy prices and taxes.
Economists are still not sure about the US, with its composite PMIs expected to be largely unchanged compared to the prior month at 53.1 compared to 53.0. The reading has been persistently in expansion territory despite the projected negative effects of tariffs.
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