Wednesday, 1 August 2012

GLOBAL ECONOMY (August 1st 2012): Declining PMI Data in China, Japan, Europe and Beyond - What Does It Mean?

Being the 1st of the month, we have a huge series of leading economic indicators being released. We'll be bringing you overall analysis along with the ISM PMI and ADP Jobs data. Until then, here's a round up of the data released this morning produced by Markit. You can find their reports here: Markit PMI Releases


(We use this data to understand what kind of market cycle we're in, as part of LONG TERM and MEDIUM TERM categories of analysis. Below, we give a very simple summary of the first reports of the day (released before ISM Manufacturing), along with notes we wrote as the reports were released.)

Japanese PMI - 47.9 in July, down from 49.9, a new lower low and the worst in 15 months.

South Korean PMI - 47.2 in July, down from 49.4, the worst month-on-month report since this report began in 2004. New orders and new business in severe contraction for an economy which is a useful bellwether for global manufacturing. Demand seems to have fallen back further than the average summer slowdown.

Dutch PMI - unmoved at a reading of 48.9, fifth month in a row in the negative "below 50" area, where it has been pretty much since mid-2011. Interestingly for the first time since April we have export orders getting stronger, and see some benefits of lower input costs, two of the things we've been waiting for. Report isn't good, highlights awful European internal demand, but has one or two encouraging signs.

Taiwan PMI - 47.5 in July, down from 49.2. Another useful bellwether, again we have international weakness cited. "Firms signalled that demand from US, European and Chinese markets weakened. Moreover, domestic demand was also reported to be lower than that seen during June. The pace of contraction in both total new orders and new export orders was the fastest since December 2011." There's a real call for further easing from China, if the latest round of action doesn't start kicking in.

Vietnam PMI - 43.6, from 46.6 in June. This isn't a report with a great track record, but the decline is still worrying even if it lags by a month or two.

Indonesian PMI - 51.4 in July, up from 50.2 in June. As I said last month, not a great indicator, but once again is a bright spot for the global economy.

Russian PMI - improved from 51.0 in June to 52.0. It has held up really well in 2012 compared to other economies but the report shows a mixed picture, with strength in internal consumer demand but all in spite of weak export demand. Of course, this doesn't always equal a satisfying economy for Russia given their reliance on oil, but there's still a good correlation to stock market performance.

India PMI - 52.9 in July, down from the reading of 55.0. Reflecting the weaker new orders from the last month's report and power outages (worst power outage in history), nowhere near as weak as the reports from mid-2011, so refusing to really feel the same pain as the rest of the world. New export orders, the key theme through these reports, have finally declined for the first time in 9 months.

Polish PMI - recovered from June’s 35-month low of 48.0, posting 49.7 in July. Last month's report really was dire, so it's encouraging to see this economy turning that trend around somewhat. "Weak international demand linked to the Eurozone crisis continued to weigh on overall new business flows in July. The volume of new export orders declined for the twelfth time in the past 14 months" 

Turkish PMI - 49.4, down from 51.4 in June. This indicator is fairly volatile and difficult to evaluate trends. Only conclusion from the report is that conditions deteriorated modestly.

Spanish PMI - 42.3 in July, up from 41.1. Still a horrible reading, but we're looking for any signs of peaks/troughs, only comfort is that this isn't a lower low. "Total new business declined sharply again, with respondents highlighting domestic markets as a particular source of weakness. That said, new export orders also fell, extending the current period of reduction to 13 months." We find ourselves waiting for that "March 2009" moment, when dire circumstances are getting slightly less dire, and equity valuations are spelling doom. No convincing signs of that yet especially, demand is still exceptionally weak.

Czech PMI - little-changed at 49.5 from June’s 49.4. Showing some signs that it troughed in May, but it's in fairly lonesome company in indicating that. Is usually a fairly good indicator for "average Europe", so will keep an eye on this one over the course of 2012.

Italian PMI - 44.3 in July, down from June’s reading of 44.6. Another lower low in the current trend, for an economy that is very important to Europe and this situation on a whole. Any silver linings? "a marked rise in international demand for Italian-produced consumer goods", we can presume is a sign that the weak Euro is helping popular Italian brands internationally, but is not offsetting overall weak demand yet.

French PMI - 43.4 down from 45.2 in June, lowest reading since May 2009. Last month was encouraging, but this erases that and adds France back into the column titled "negative". Output and new orders shrinking. Weak demand at home and abroad, hardly offset by lower input prices.

German PMI - 43.0, down from 45.0, lowest level since June 2009. New lower low in the current trend, with new work failing to come in to replace completed projects. We know how important the German economy is to the European economy, "This is the longest continuous period of falling new orders since the 
survey began in April 1996". Big declines in Western European demand (UK and France), softer demand in the US and China. Backlogs of work are being eaten into - without this, manufacturing activity would be lighter. Whether the market does or doesn't react to this awful data in 2012, feeling uncomfortable buying equities here is surely understandable.

Greek PMI - 41.9 in July, from 40.1 in June. Hard to really gain any meaningful conclusions here as a bellwether for global conditions, Greece are in a unique kind of mess. Sharp reductions in new orders and new export orders, such is the lack of confidence and demand.

UK PMI - 45.4 in July, down from a revised reading of 48.4 in June. This is particularly bad news for the UK, worst reading in the current trend and the worst since 2009. How bad the current recession will be is unknown, but this data doesn't lend itself to an improvement in 2012. This was a moderately bright spot last month, but now is joining pretty much every major European economy in the mess.

China PMI - 49.3 in July, up from 48.2 in June, a slight improvement. We've been in the sub-50 territory since 2011 on this indicator - Chinese weakness is undoubtedly playing a part in current conditions in a way under-reported compared to Europe. Policy easing is expected before GDP growth slows further, there's a real chance Chinese growth could be lower than 4-5% if this trend continues.

Overall Eurozone PMI - 44.0 in July, down from 45.1, another lower low in the current trend. I was expecting at least some bright spots like last month, but the trends here are fairly definitive, especially coming from Germany and France.


While we anticipate the upcoming US PMI data will be the most significant news of the day, there are plenty of conclusions to draw from the data so far:

  • Most Major Economies Below 50 in the headline PMI reading demonstrates the weakness in global economic leading indicators. The last two major periods where global PMI readings turned negative in such a pronounced fashion were in 2000 and 2007/2008. While we cannot say how this will translate in the equities markets, we know from past record that being cautious is warranted - especially going into August, with the Dow above 13000.
  • Weaker Global Demand/New Orders is a theme that carries over from the last month in a continuing trend, with worryingly increased momentum in big manufacturing economies.
  • More Dramatic Reductions in Input Costs also carries over from the previous month's reports, with no easing effect on manufacturing conditions.
  • Backlogs of Orders are being eaten into while inventories are generally rising, most pronounced in the German PMI report. This is worrying going forward, as New Orders will need to come in to prevent further weakness in Q3, once the backlog of projects is depleted. At that stage, it is possible we'll see more pronounced job cuts in the manufacturing sector.
  • The Glimmer of Signs the weaker Euro/lower Oil Prices are helping? It may be fairly small consolation, but it's worth pointing out after such a tough time for European equities and manufacturers, the first reports have started to suggest a weaker Euro is helping push demand for certain big Italian brands with the quote, "a marked rise in international demand for Italian-produced consumer goods", although only Ireland and the Netherlands posted expansion in New Export Orders.

As posted last month, we have no interest in being permanently bullish or bearish, or pushing any agenda - only in analysing ongoing economic conditions from an investment standpoint. While we cannot be certain how the worsening conditions will affect equity market performance, or the exact earnings performance for global businesses, it is clear that this current economic trend will benefit neither.

Our view from the data so far is to reiterate our need for downside protection going into August, to protect our portfolios from both volatility and potential declines in equity markets from these levels.

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