European Manufacturing Capitulates
Resource Hotspot 350
One of the better indicators of the outlook for the resource sector is the monthly manufacturing sector Purchasing Managers Index (PMI), which correlates well with industrial production (IP) and hence with commodity demand. PMIs have been falling steadily in both Europe and China for some months and the deteriorating economic conditions have led to direct policy action in both regions. By contrast data is indicating that conditions in the U.S. continue to slowly, but steadily improve.
The latest Purchasing Managers Index (PMI) data provided negative headline results being in Europe, China and Japan – partially offset by a stronger result in the U.S. Overall, the official PMI had a weak headline of 49.6 (slipping slightly further into contraction territory from 49.9 previously), with New Orders dropping to 48.6 from 49.5 and the Finished Goods Inventory rising.
The Eurozone has now shifted into capitulation mode as its well publicised financial woes escalate. The regional PMI has been in contraction phase for four consecutive months, and the negative trend has been accelerating with all major Euozone countries now in a contraction phase. This has resulted in decisive, coordinated policy announcements from Central Banks – sparking a rally on global equity markets.
The Federal Reserve, along with the Banks of England, Canada, Japan, Switzerland and the European Central Bank, announced it will lower the rate of US dollar swap liquidity arrangements (from 100bps to 50bps) in response to a growing funding squeeze. The action is aimed at alleviating strains in financial markets and thereby mitigating the effects of such strains on the supply of credit to households and businesses – thus helping to foster economic activity. Not only does it provide cheap, emergency US dollar loans to banks in Europe, but it helps isolate any spillover of the European problems into the U.S. economy – where the recovery phase appears to be gathering momentum.
At the same time the Chinese PMI has slipped below 50 for the first time since February 2009. This largely reflects the impacts of tight credit conditions on construction activity – with policy makers having been focussed on combating inflationary pressures during much of 2011.
However, with inflation appearing to have topped out and against a backdrop of demand weakness from Europe, there has been an important announcement that China’s Reserve Requirement Ratio (RRR) is being cut by 50bps. While any easing will take some time to flow through to an acceleration of economic activity, it sends a clear signal of intent to markets. In turn this has led to a short covering rally on commodity markets on the anticipation of improving demand.
Japan also followed the negative trend in the latest PMI survey, shifting back into contraction mode after two months of growth. The weaker figure reflects persistent yen strength and fewer new order intakes from emerging Asia – both from China and elsewhere. Regional supply chain activity has also been disrupted by the floods in Thailand.
Turning to the U.S., the news flow is becoming increasingly positive. In relation to the PMI, the headlined figure jumped strongly to 52.7 from 50.8. Commenting on the data, the U.S. Institute of Supply Management stated:
“The PMI registered 52.7 percent, an increase of 1.9 percentage points from October’s reading of 50.8 percent, indicating expansion in the manufacturing sector for the 28th consecutive month. The New Orders Index increased 4.3 percentage points from October to 56.7 percent, reflecting the second month of growth after three months of contraction. While the Prices Index, at 45 percent, increased 4 percentage points from the October reading of 41 percent, prices of raw materials continued to decrease (registering below 50 percent) for the second consecutive month. Respondents cite continuing concerns about the general economic environment, government regulations and European financial conditions, but are cautiously more optimistic about the next few months based on lower raw materials pricing and favorable levels of new orders.”
At the same time the U.S. Federal Reserve has released its latest ‘Beige Book’, which is an anecdotal survey based on information gathered by officials at its 12 regional banks. A key conclusion of the report is that the economy has expanded at a slow to moderate pace in 11 of 12 districts (St Louis being the exception), led by gains in manufacturing and consumer spending. This reinforces the central bank’s view that the economy is strong enough to skirt a recession.
While there are lingering concerns that economic growth is not yet fast enough to make inroads into employment, the latest data provides some encouragement. Payroll gains improved solidly during November, and when combined with an increase in people leaving the workforce, helped push the jobless rate down to 8.6% from 9.0% – its lowest level since March 2009.
The PMI data for the key economic regions is outlined in the table and graph below:
Source: ISM, Markit, SR
| Headline PMI by Area |
US | Eurozone | Japan | China |
|---|---|---|---|---|
| Jan-10 | 58.4 | 52.4 | 52.5 | 55.8 |
| Feb-10 | 56.8 | 54.2 | 52.5 | 52.0 |
| Mar-10 | 59.6 | 56.6 | 52.4 | 55.1 |
| Apr-10 | 60.4 | 57.6 | 53.5 | 55.7 |
| May-10 | 59.7 | 55.8 | 54.7 | 53.9 |
| Jun-10 | 56.2 | 55.6 | 53.9 | 52.1 |
| Jul-10 | 55.5 | 56.7 | 52.8 | 51.2 |
| Aug-10 | 56.3 | 55.1 | 50.1 | 51.7 |
| Sep-10 | 54.4 | 53.7 | 49.5 | 53.8 |
| Oct-10 | 56.9 | 54.1 | 47.2 | 54.7 |
| Nov-10 | 56.6 | 55.3 | 47.3 | 55.2 |
| Dec-10 | 58.5 | 57.1 | 48.3 | 53.9 |
| Jan-11 | 60.8 | 57.3 | 51.4 | 52.9 |
| Feb-11 | 61.4 | 59.0 | 52.9 | 52.2 |
| Mar-11 | 61.2 | 57.5 | 46.4 | 53.4 |
| Apr-11 | 60.4 | 58.0 | 45.7 | 52.9 |
| May-11 | 53.5 | 54.6 | 51.3 | 52.0 |
| Jun-11 | 55.7 | 52.0 | 50.7 | 50.9 |
| Jul-11 | 50.9 | 50.4 | 52.1 | 50.7 |
| Aug-11 | 50.6 | 49.0 | 51.9 | 50.9 |
| Sep-11 | 51.6 | 48.5 | 49.3 | 51.2 |
| Oct-11 | 50.8 | 47.1 | 50.6 | 50.4 |
| Nov-11 | 52.7 | 46.4 | 49.1 | 49.0 |
Source: ISM, Markit, SR
Note: a reading above 50 indicates manufacturing sector growth and below 50 represents contraction.
