PMI print suggests deflationary pressures returning

June PMI data points to stable manufacturing conditions – but factory gate deflation has unexpectedly returned.

A quick refresher: PMI figures reflect month-on-month changes in manufacturing conditions as reported by companies.

• Readings above 50 indicate improvement; readings below 50 signal deterioration.

The headlines:

• The NBS manufacturing PMI came in at 50.6, broadly in line with May's 50.5 reading.
• The RatingDog PMI came in at 51.7, also little changed from the previous month's 51.8.

Manufacturing activity picked up throughout June:

• The NBS production subindex ticked up to 51.4, while new orders came in at 51.2 – reversing May's contraction.
• The RatingDog production and new orders subindices also remained in expansionary territory.

The most notable development was an unexpected return of producer price deflation:

• The NBS producer price subindex fell into contractionary territory at 48.2, reversing five consecutive months of expansion.
• This came despite the raw material purchasing price index remaining expansionary at 54.2, albeit down sharply from the previous month – meaning manufacturers are still paying more for inputs but cutting the price of finished goods.
• The RatingDog survey, by contrast, reported expansion in both input and output prices.

Get smart: The divergence between rising input costs and falling output prices is the most significant signal in this month's data.

• Manufacturers appear to be absorbing higher input costs while cutting factory gate prices – a dynamic that will compress margins further and is consistent with the ongoing profit squeeze in downstream industries.