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May PMI Manufacturing – depressed despite a blip in new orders, cost inflation filters through into output prices


Though the headline index crept up to a 6-month high of 48.9 in May, it remained near post-crisis lows. Component-wise, the picture was mixed as the lingering output cutback was accompanied by a surprising advance in orders intake. That said, as orders picked up, inventory of finished goods dropped, implying that incoming new orders are being met by existing inventory, not new production. The output sub-index posted a similar reading of 49.1 due to the contraction in consumer-related industries. Interestingly, the output of investment goods printed growth after a protracted period of decline, which could turn out to be a one-off in the absence of improvement in underlying conditions. At the same time, the new orders sub-index registered a slight increase for the first time in 6 months, owing to strength in the consumer sector.

Given the time lag of several months between the marked progress in input and final prices, the almost 3-year high in the input prices sub-index came as little surprise in May’s PMI report, while stabilising cost pressures look encouraging.

Tight pressure on margins pushed companies not only to increase final prices (became possible with some relief in orders intakes), but to speed up optimisation labour costs as well (the pace of job cuts has advanced visibly, with the respective sub-index down to 46.2).

Overall, the tough time for the Russian industrial sector is not over and we would rather treat this pickup in new orders as a blip in volatile monthly time-series. The balance of evidence implies scare support for a healthy rebound in the economy (4% YoY growth in manufacturing was due to a range of simultaneous short-lived factors). We maintain our bearish outlook for both investment and consumer orders intakes, which will keep a lid on the supply front. However, there are positive signs to highlight: vanishing FX pass-through bode well for our expectation of a mid-year turnaround in the inflation trend.
Daria Isakova, Vladimir Kolychev, Dmitri Fedotkin
VTB Capital analyst


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