The Day at a Glance | May 31 2022

The Top

Inflation in Europe increased more than expected during May (8.1% annual vs 7.8% e.).

China once again records economic contraction in May.

Joe Biden will meet with Jerome Powell in the White House to discuss inflation and the economy.

Europe reached an agreement to ban 90% of crude oil imports from Russia by the end of the year; oil prices increased.

Crude oil production in Mexico receded to 1.607 million daily barrels, its lowest level in forty years.

Unemployment in Mexico descends to 3.1% in April.

Economic environment

Inflationary surprises. Inflation in Europe increased more than expected during May, according to Consumer Price Index timely estimates, which logged a 0.8% monthly (8.1% annual) increase. This is a new record level of inflation for the European block and will likely put pressure on the European Central Bank to consider carrying out faster increases to contain it. Inflation in Europe is being boosted by energy (39.2% annual) and food (7.5% annual) prices, but underlying inflation has also maintained an increasing trend after logging a 3.8% hike during the month (0.5% m/m). Along with inflationary pressures, the EU has recently reached an agreement to stop approximately 90% of crude oil imports from Russia as part of its sanctions on the country for its invasion of Ukraine. This measure has reinforced a rise in oil prices, which reached their highest level since March this morning. Most of the ECB´s members still back gradual interest rate increases in July and September, but the deterioration seen in the inflationary environment could lead them to consider carrying out more aggressive movements – like the US Federal Reserve. Inflation is expected to slow down in the second part of the year, but it´s not forecasted to drop below 6%.

Economic setbacks persist in China. Official PMI´s for China´s economy logged an economic contraction for a second consecutive month during May despite logging an improvement with respect to April. The manufacturing PMI increased to 49.6 (vs 47.4 Apr.) and exceeded estimates (48e.); while the non-manufacturing index reached 47.6 (vs 41.9 Apr.). The data still reflects a negative impact due to the government´s “zero COVID”  policy and its economic repercussions. However, the economy is expected to gradually improve as restrictions are lifted, particularly during June: Activities have started to normalize in Shanghai and Peking. PMI´s are expected to log moderate growth in the following months, and economic data should confirm a stronger recovery in the following weeks. May has started to show signs of improvement in both foreign and domestic demand, although they are both in contraction; while employment remains weak. This confirms that growth in the 2Q22 could be low, or even negative; but recovery will be seen starting in June. Nevertheless, this recovery could be limited in light of slow foreign demand (which will limit growth in exports, China´s most important growth driver) and domestic weakness (because of high levels of unemployment and a continued crisis in the real-estate sector).