Japan's February PMI: Services Support Economic Expansion, While the Manufacturing Remains in the Doldrums

Data Interpretation

Summary:

The February PMI data for Japan indicates an accelerated expansion in private sector economic activity, with the composite PMI reaching a five-month high. While the service sector continued to expand, the manufacturing sector remained weak. Business confidence declined to its lowest level since 2021, reflecting the impact of inflation, labor shortages, and economic uncertainty.

The S&P PMI data released on February 21 indicates:

The preliminary S&P Manufacturing PMI for Japan in February stood at 48.9, up from 48.7, remaining in contraction range.

The preliminary S&P Services PMI for Japan in February stood at 53.1, up from 53.0, reaching a five-month high.

The preliminary S&P Composite PMI for Japan in February stood at 51.6, up from 51.1, reaching a five-month high.

The latest PMI report indicates that Japan's Composite PMI Output Index rose to 51.6 in February, up from 51.1 in January, signaling an eighth consecutive month of private sector expansion, reaching a five-month high. Economic growth was primarily driven by the services sector, while manufacturing sector remained subdued.

In the services sector, the Business Activity Index increased to 53.1, marking the fourth consecutive month of expansion for the sector, with the fastest growth rate since September of the previous year. Companies generally attributed the growth to business expansion initiatives and improved demand. Despite a slight slowdown in new business growth, overall demand remained robust. Corporate hiring increased for the seventeenth consecutive month, aiding in the management of outstanding orders. However, due to labor shortages and cost pressures, service sector companies' confidence in the next 12 months fell to its lowest level since January 2021.

In the manufacturing sector, the manufacturing PMI saw a marginal increase from 48.7 to 48.9, yet it remains in contraction range. While the declines in output and new orders have moderated, the industry continues to experience a downturn. Manufacturing employment contracted for the first time since November of the previous year, attributed to weak market demand. Corporate procurement activities decreased, leading to further inventory drawdowns. Furthermore, confidence regarding future prospects has plummeted to its lowest point since June 2020, signaling a cautious outlook among manufacturers.

Regarding the labor market, there is a noted labor shortage. The rate of employment growth within Japan's private sector has decelerated, reaching its lowest level in over a year. Although the service sector continues to expand and increase hiring, the job losses in manufacturing have partially offset these gains.

Concerning inflation, the rate of input cost inflation has largely remained at the elevated levels observed in January. Businesses have reported persistent high costs for raw materials, transportation, and labor. Despite these rising input costs, the increase in companies' selling prices has slowed, reflecting the dampening effect of market demand on price transmission.

Looking ahead, Japanese corporate sentiment deteriorated further in February, reaching its lowest point since 2021. Persistent inflationary pressures, labor shortages, and global economic uncertainty continue to challenge the business outlook. While the service sector remains a pillar of economic growth, the sustained weakness in manufacturing could impede the overall recovery.

Overall, the Japan's February PMI indicates a slight acceleration in economic expansion, but manufacturing remains subdued, and business confidence has declined significantly. In the coming months, the market will be closely monitoring government policies, shifts in global demand, and inflationary trends to assess the sustainability of the economic recovery.

Japan's February PMI

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Glendon

Economic

Forex

The EUR/USD pair is hovering around 1.0503, extending its rally since midweek. The major currency pair has climbed to a two-month high, with market sentiment favouring further gains.

Key drivers behind EUR/USD’s rise

A decline in US Treasury bond yields has weighed on the US dollar, following a series of weaker-than-expected US economic reports and dovish remarks from Federal Reserve officials.

Austan Goolsbee, President of the Federal Reserve Bank of Chicago, stated that he does not expect the Core Personal Consumption Expenditures (PCE) index to be as concerning as the recent Consumer Price Index (CPI) data. As a key inflation measure for the Federal Reserve, the Core PCE significantly influences monetary policy expectations.

Meanwhile, St. Louis Fed President Alberto Musalem warned of stagflation risks and the potential challenges in setting future policy.

The latest US jobless claims data further raised concerns, showing an increase to 219,000 from the previous 213,000, exceeding the forecast of 214,000.

In the eurozone, the euro could see further upside if the German election outcome triggers additional short-covering in EUR/USD.

Technical analysis of EUR/USD

On the H4 chart, EUR/USD has completed a growth wave to 1.0470, forming a consolidation range around this level. The market has since broken higher, paving the way for further gains towards 1.0544. A correction towards 1.0385 may follow after reaching this level. The MACD indicator supports this scenario, with its signal line above zero and pointing upwards, indicating continued bullish momentum.

On the H1 chart, the pair executed a growth wave to 1.0470, followed by a narrow consolidation range around this level. The likelihood of an upward breakout towards 1.0520 remains high. After reaching this level, a correction to 1.0470 could occur before the growth wave resumes towards 1.0544. The Stochastic oscillator confirms this outlook, with its signal line above 80 and trending towards 20, suggesting a possible pullback before further gains.

Conclusion

EUR/USD remains in an uptrend, supported by weakening US Treasury yields and a cautious Fed outlook. If bullish momentum continues, the pair may extend gains towards 1.0544. However, a corrective move could follow before further upside. The outcome of the German election could also influence short-term price action, potentially driving additional volatility.

Source: ACTIONFOREX

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Warren Takunda

Economic

The Pound-to-Euro exchange rate (GBPEUR) jumped to 1.2080 after the ONS said retail sales rose 1.7% month-on-month in January, breezing past expectations for a print of 0.3% and recovering from December's dismal -0.6%.

The Pound-to-Dollar exchange rate rallied to a new two-month high at 1.2678 after markets pared back bets for a Bank of England rate cut in March.

Retail sales growth now stands at 1.0% year-on-year, better than the 0.6% markets anticipated.

"Retail sales data for January provided some good news, showing some decent growth - well above expectations. The economy is proving to be a conundrum for policy makers at the moment. There is no doubt it could do with some stimulus, but inflation is a concern, and this data suggests the consumer is in a healthy state whilst confidence levels show the opposite," says Neil Birrell, Chief Investment Officer at Premier Miton Investors.

Pound Sterling Rallies Against Euro and Dollar on Retail Sales, Borrowing Surprises_1

However, the Pound's upside potential will be curbed by the details in the report, with Charlie Huggins, an analyst at Wealth Club, saying they are not as good as they first appear.

He explains the recovery was largely due to a significant recovery in food sales. Non-food stores saw sales decline by 1.3%, with clothing sales especially weak, "hardly a sign that consumers are feeling flush."

"The large increase in food sales is clearly a positive for supermarkets, but it may be a worrying sign for other parts of the economy. More people eating at home is especially bad news for restaurants, pubs and bars. These sectors are in dire need of footfall, with their costs set to rise significantly in April following the Autumn Budget," says Huggins.

He warns that few retailers will cheer these figures.

Tax Boost for Reeves

The UK government recorded a surplus of £15.442BN in January said the ONS, thanks to a £117.6BN tax haul in January 2025, an increase of £7.8BN compared to January 2024.

This was largely driven by an increase in self-assessment taxes of £36.2BN, making for the highest January figure on record.

Unfortunately for Chancellor Rachel Reeves, the surplus was £5.1BN lower than the £20.5BN forecast by the Office for Budget Responsibility (OBR) in October 2024.

Still, the current budget balance (day-to-day public sector activities) was in surplus by £24.6BN, the highest since records began in 1997.

Markets Pare Back Rate Cut Bets

The Pound extends a short-term recovery on the back of these data developments as markets reduce expectations for the number of cuts to come from the Bank of England this year.

The market now sees just two cuts as robust demand - as per these retail sales data - suggest additional easing risks exacerbating rising inflation.

This week, the ONS reported inflation unexpectedly rose 3.0% y/y in January and economists warn it is now on course to breach 4.0%, making it harder for the Bank of England to explain why it is cutting interest rates when inflation is running away from the 2.0% target.

The strong retail sales outturn reflects rising wages and a still healthy labour market. This could, however, all change in the spring when national insurance hikes and minimum wage rises are foisted on businesses.

"We expect the pound sterling to remain robust short term as the UK’s rate advantage over European peers rises," says David Alexander Meier, Economic Research analyst at Julius Baer.

Julius Baer thinks the Bank of England will likely remain cautious, holding rates in March. "The BoE's slow pace of cuts will temporarily widen the pound's interest rate advantage," explains Meier.

The Swiss bank sticks to its short-term optimistic outlook on the pound with a 3-month target of EUR/GBP 0.82, with strength likely to fade as the rate advantage narrows later this year.

This translates into a GBP/EUR equation of 1.22.

Source: Poundsterlinglive

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S&P Global Inc.

Data Interpretation

On February 21, the February S&P PMI was released:

Flash Australia Manufacturing PMI: 50.6 (Jan: 50.2). 27 month high.

Flash Australia Services PMI Business Activity Index: 51.4 (Jan: 51.2). 6-month high.

Flash Australia PMI Composite Output Index: 51.2 (Jan: 51.1). 6-month high.

At 51.2 in February, up from 51.1 in January, the headline seasonally adjusted S&P Global Flash Australia PMI Composite Output Index signalled a fifth successive monthly expansion in private sector output. While modest, the rate of expansion was the most pronounced since last August.

In the services sector, the Business Activity Index rose to 51.4 in February, accelerating for a third consecutive month, with the latest rise attributed to greater inflows of new business. In comparison, manufacturing output rose only fractionally. However, businesses generally held a cautious view of the future economic environment, leading to a decline in business confidence. Rising labor costs continued to fuel input cost inflation in the services sector.

The Manufacturing PMI index rose to 50.6, indicating a slight increase in manufacturing output, albeit at a slower pace than the services sector. The Manufacturing Production Index fell from 50.5 to 50.1, signaling a slowdown in manufacturing growth. Notably, manufacturing new orders resumed growth for the first time since November 2022, indicating an improvement in market demand. However, manufacturers remained cautious in hiring, with manufacturing employment declining for the second time in the past three months.

In terms of the job market, employment levels in Australia's private sector continued to grow for the second consecutive month, consistent with the trend in new business and overall output. Employment growth was faster in the services sector, while hiring in the manufacturing sector remained sluggish. Meanwhile, both business inventories and backlogs of work declined, indicating that some firms were still working through their previous production backlogs.

Turning to prices, input cost inflation climbed for a third consecutive month in February, rising to the highest rate since last September. Panellists often mentioned higher material, energy, financing and wage costs. Australian private sector firms continued to share their cost burdens with clients, leading to another increase in average selling prices. The rate of inflation eased to match the series average, however, as firms were unwilling to fully pass on cost increases amidst heightening competition.

Looking ahead, February's S&P Global Flash Australia PMI data outlined further improvements in private sector business conditions. However, a fall in business sentiment to the lowest level since last October provided mixed signals for near-term economic performance. Concerns listed by survey respondents included the impact of still-elevated interest rates and uncertainties surrounding both the domestic and global economy. The moderate recovery in manufacturing and weak export demand may continue to weigh on overall growth. However, with the ongoing expansion of the services sector and potential policy adjustments, there is still hope for Australia's economic recovery.

Overall, Australia's February PMI data indicates that while the growth momentum has strengthened, the economy still faces challenges from inflationary pressures and declining business confidence. In the coming months, the market will closely monitor policy directions and the recovery of global demand.

Australia February PMI

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FED

Remarks of Officials

On February 20, St. Louis Fed President Alberto Musalem delivered remarks at the Economic Club of New York in New York City, the details of which are as follows:

The U.S. economy exhibits robust strength, with both GDP levels and growth rates at or exceeding long-term potential. Consumer spending continues to be a key driver of expansion. Personal consumption expenditures surged at a robust 4.2% in the fourth quarter, the highest for any quarter in 2024. Business confidence has improved over the past three months, accompanied by increased planned capital expenditures.

Inflation has significantly receded from its mid-2022 peak, yet it remains above the FOMC's 2% target, and certain measures of inflation expectations have recently risen. The January CPI report revealed substantial monthly increases in goods, services, and housing prices, as well as in both core and overall inflation rates. Monetary policy is moderately restrictive following a 100-basis-point rate cut in the fall, though less so than six months prior. This shift may necessitate a more hawkish stance from the Fed.

The labor market remains robust, with employment risks appearing broadly balanced and recent indicators suggesting some strengthening. Over the past three months, non-farm payrolls have increased by an average of 237,000, exceeding the break-even rate, and the unemployment rate has fallen to 4%. While job openings and the quits rate have moderated, the rate of layoffs remains low. Although average hourly earnings and other measures of employment costs have shown steady growth, the labor market is not a significant source of inflationary pressure, as productivity has also improved.

Overall, the risk of inflation expectations becoming unanchored is elevated, given strong economic growth, a solid labor market, supportive financial conditions, core inflation exceeding 2%, and some recent increases in inflation expectations, compared to a scenario where the economy has excess capacity and consumers and businesses have not experienced high inflation. If inflation persists above the target level or expectations continue to rise, a more restrictive monetary policy stance may be warranted.

Federal Reserve's Musalem

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FED

Remarks of Officials

"My view is, before we got to the uncertainties from policy and from geopolitics and from some others, the overall thing (inflation) looked pretty good to me," Austan Goolsbee, Chicago Federal Reserve President, said. The Labor Department reported a larger-than-expected 0.5% month-over-month increase in CPI for January. The year-on-year figure also climbed back to 3% for the first time since June, having risen each month since September. The comparable Personal Consumption Expenditures Price Index the Fed uses for its 2% inflation target is due to be released next week, and most economists estimate it will show less of an increase than reflected in the CPI.

In his discussion about the labor market, Goolsbee described it as "epically strong." He suggested that the job market remains robust despite uncertainties around immigration policy. Over half of the labor force in the past decade has been composed of new workers, many of whom are likely immigrants.

President Trump has recently proposed or implemented a series of tariffs. Last week, Trump announced a 25% tariff on steel and aluminum imports and plans to impose "reciprocal tariffs" on other countries. Additionally, there are considerations for tariffs on automobiles, semiconductors, pharmaceuticals, and lumber this week. Goolsbee expressed concern about the potential for these large-scale tariffs to cause a significant supply shock, which could exacerbate inflation, similar to the effects seen during the COVID-19 pandemic.

The tariffs imposed during Trump's first term as president did not have a material impact on inflation, Goolsbee said, in part because they were narrower and included enough exemptions that supply networks were not affected. But in thinking about the more broad-based and higher tariffs currently in development by Trump," it depends on how many countries they are going to apply to and how big are they going to be. And the more it looks like a COVID-sized shock, the more nervous you should be about that."

Goolsbee said it's important to remember that great progress has been made in bringing inflation down from the four-decade highs reached in 2022, but the level of uncertainty around the economy and the evolving policies of the new Trump administration around tariffs may be having an impact. If tariffs raise prices, the Fed has to think about it.

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Justin

Economic

China’s distressed developers are increasingly asking local courts to drive their restructuring efforts, as weak home sales continue to weaken their ability to make headway or deliver on private debt workout plans.

Chongqing Casin Property Development Group Co late last month became the newest among its peers to apply for the court to overhaul its debt. The move followed a Bloomberg News’ report that defaulter China Fortune Land Development Co is considering scrapping a creditor-approved debt plan for a court-led solution.

Meantime, Jinke Property Group Co, the country’s first high-profile, listed delinquent builder to pursue this option, started a creditor vote on its relevant restructuring proposal earlier this week. The vote will end on March 31.

The expanding list of Chinese developers seeking the court’s help is the latest sign of stress in a property debt crisis that’s entering its fifth year, as private debt talks become protracted and existing restructuring efforts suffer setbacks. While a court-driven process does present an alternative path for distressed firms, its success hinges on key factors including the introduction of cash-rich new investors.

“Court-led restructuring is the last resort for distressed companies,” said Qian Wenhan, a partner of Zhong Yin Law Firm, who specialises in restructuring and bankruptcies. “As China’s housing market has yet to notably stabilise, and some companies’ debt negotiations become lengthy or even hit an impasse, more developers are expected to use this approach to solve their predicament.”

The trend is also evident across industries as a slowdown in the world’s second-largest economy takes its toll. The number of Chinese listed companies seeking court-led restructuring rose to a six-year high of 29 last year, according to a report by Shanghai-based AllBright Law Offices. Nearly a quarter of them were from real estate or construction firms, it shows.

Court-supervised restructuring for developers in China remains a novelty, despite a record wave of defaults in the industry over recent years. Such an approach generally requires a procedure to place the company under bankruptcy administration, and may include white knights to bring in new funds.

A growing number of Chinese developers also have ended up in court in Hong Kong since the crisis began, although it was predominantly the offshore creditors that applied to liquidate the defaulters’ business. At least seven such builders, including former industry behemoth China Evergrande Group, has received the court’s so-called winding-up rulings.

To be sure, whether a local court will agree to drive a company’s restructuring depends on key conditions such as securing strategic investors who can inject new life into the debt-laden firm, lawyers and analysts say.

While the sample pool in China remains too small to meaningfully analyse the impact of court-led restructuring on creditors and investors, the prolonged nature of the debt crisis has lowered the expectations for some.

“Holders of public bonds can otherwise only live to see corporate assets depreciate over time,” said Ma Suiqing, a senior partner and fixed income investment director at Tensor Pacific Co, a Hangzhou-based hedge fund. “That’s why court-led restructuring of developers is clearly beneficial to most bondholders, as it at least offers some level of transparency and fairness.”