FXTRADING Economic Data Summary (Asia-Pacific | 05/26)

Bank of England Caught in a Dilemma

The UK flash Composite PMI for May plunged from 52.6 to 48.5, falling back below the 50 expansion-contraction threshold and marking the lowest level in 13 months. The biggest pressure came from the services sector, where the Services PMI collapsed from 52.7 to 47.9, the weakest reading in 64 months, signaling simultaneous weakness in consumer demand, business activity, and corporate orders. In comparison, manufacturing continued to provide some support for the economy, with the Manufacturing PMI holding steady at 53.7 while the Manufacturing Output Index edged up slightly to 52.4.

Persistently high energy prices, combined with supply chain disruptions caused by tensions in the Middle East, have once again pushed up corporate purchasing costs rapidly. At the same time, domestic political uncertainty in the UK has started to affect business investment and hiring plans. S&P Global estimates that UK GDP could contract by around 0.2% quarter-on-quarter in the second quarter.FXTRADING believes that the drop in PMI to 48.5 indicates demand has already started to contract, while energy and supply chain pressures continue to prevent inflation from cooling significantly, leaving the Bank of England with increasingly limited policy flexibility.

Eurozone Stagflation Risks Intensify Again

The Eurozone Composite PMI fell from 48.8 to 47.5 in May, hitting the lowest level in 31 months. The Services PMI declined from 47.6 to 46.4, marking a 63-month low. Although manufacturing activity remained in expansion territory, momentum weakened noticeably, with the Manufacturing PMI easing from 52.2 to 51.4 and the Manufacturing Output Index slipping from 52.3 to 51.0.

Over recent months, European manufacturers had managed to maintain some production strength through advance inventory building. However, as energy prices continue rising and household living costs increase, overall demand is clearly weakening. More companies are reporting falling orders, slower hiring, and mounting pressure on profit margins. FXTRADING believes that while economic activity across the Eurozone continues to contract and both employment and demand weaken simultaneously, inflation remains stubbornly high due to energy and supply chain issues. The European Central Bank may face an increasingly difficult situation in the second half of the year, as premature easing could reignite inflation, while maintaining high interest rates for too long would place even greater pressure on the economy.

Hawkish Voices Within the Bank of Japan Are Growing Stronger

Bank of Japan board member Junko Koeda stated that rising oil prices caused by tensions in the Middle East could push Japans underlying inflation rate back above 2% in the future. She believes that if energy prices remain elevated for an extended period, further interest rate hikes by the Bank of Japan would be a reasonable policy response.

For a long time, markets believed that Japan‘s inflation was mainly driven by imported energy shocks and therefore lacked sustainability, meaning the BOJ’s rate hike cycle would remain gradual. However, some policymakers are now becoming concerned that persistently high oil prices could gradually feed through into corporate costs, wages, and final consumer prices.FXTRADING believes that the future policy direction of the BOJ will largely depend on energy prices and long-term inflation expectations. If global oil prices remain elevated, internal support for further rate hikes within the BOJ is likely to continue growing.

Australian Employment Suddenly Weakens

Australias employment fell by 18.6K in April, while markets had expected an increase of 15.2K. The unemployment rate rose from 4.3% to 4.5%, reaching the highest level since 2021. Full-time employment declined by 10.7K, part-time employment fell by 7.9K, and the participation rate edged lower from 66.8% to 66.7%.

From the structure of the data, Australias labor market is beginning to show clearer signs of cooling. Corporate hiring has slowed noticeably, and some workers are even starting to leave the labor force. However, total hours worked still rose by 0.8% month-on-month, suggesting businesses are not yet carrying out large-scale layoffs and are instead relying on existing employees to maintain operations. FXTRADING believes that weaker Australian employment data suggests that prolonged high interest rates are gradually starting to suppress demand and corporate expansion. With unemployment rising to 4.5%, the need for the Reserve Bank of Australia to tighten policy further has clearly diminished, and future policy focus may increasingly shift toward monitoring the pace of economic and labor market slowdown.