Today is largely about sentiment data, which is never the firmest of foundations in the world of economics.
In theory, sentiment data is supposed to measure real things. The export orders in the PMI is supposed to be a volume measure. Sadly, the evidence is that the correlation of sentiment data to nominal measures tends to be higher than is the correlation to real measures. Value indicators are therefore passed off as volume indicators.
Nonetheless, sentiment data hold considerable sway in financial markets as a leading indicator and sentiment data is particularly highly priced by investors. That means that whatever the faults it has in demonstrating economic reality, sentiment data must receive some attention.
The most important PMI date we have gotten so far are:
- The Nikkei Japan Manufacturing PMI
came in at 47.7 in May (the lowest figure since January 2013), down from 48.2 in April, signaling a sharper rate of deterioration in the Japanese manufacturing sector where sharper contractions in output, new orders and stocks of purchases were observed. Production at Japanese goods producers also decreased at the fastest rate since April 2014 in May.
It is a fact things are not going well in Japan and when Prime Minister Shinzo Abe, at the occasion of the G7 meeting in his country only a few days ago was talking up what he called parallels to the global financial crisis that followed the 2008 Lehman Brothers bankruptcy, it looks like he knew very well what he was talking about.
Anyway, Prime Minister Abe just postponed the planned sales tax hike
until October 2019, which confirms how bad the economic situation of Japan must be.
Investors should take notice that this act will probably have consequences for Japan’s ratings and Abe could be, internally speaking of course, entering into a political minefield.
Amy Brownbill, economist at Markit commented about the Japan PMI data: “The aftermaths of the earthquakes in one of Japan’s key manufacturing regions continued to weigh heavily on the manufacturing sector. Both production and new orders declined sharply mid-way through the second quarter of 2016. A marked fall in international demand also contributed to the drop in total new orders, as exports declined at the fastest rate since January 2013.”
- In China, the Caixin General Manufacturing PMI
came in at 49.2 in May, down from 49.4 in April, and below the neutral 50.0 value for the fifteenth successive month, which shows the health of China’s manufacturing sector continued to decline in May.
The new data show that China’s economy has not been able to confirm, and this is very important:
- The recovery that China had experienced during the first quarter.
- The slowdown is definitively not (yet) in the process of bottoming out.
All this raises again serious questions about the government’s use of proactive fiscal policy measures that have to be accompanied by prudent monetary policy to prevent the economy from slowing even further.
In the meantime the Chinese currency, the yuan was fixed at a 5-year low against the dollar.
In case the weakening trend of the Chinese currency should continue, which I think it will, and the Japanese yen doesn’t weaken also, which it doesn’t seem to do for now, then, at least in my opinion, there is trouble brewing in the foreign exchange markets.
- The Euro area May PMI data
signaled a further growth slowdown in the manufacturing sector notwithstanding inflows of new business from both domestic and export markets continued in positive territory, but have only been rising at lackluster rates.
It looks like the external sector of the Eurozone is being handicapped by the moves in the euro and the impact that exercises on export producer price inflation (PPI).
We’ll see if on Thursday at the press conference that follows the ECB Governing Council Monetary Policy meeting, Mr. Draghi will touch this delicate subject.
Chris Williamson, Chief Economist at Markit commented: “France and Greece remain the key areas of concern, both seeing manufacturing contracting again in May. Worryingly, however, growth has also slowed sharply in previously fast-growing countries such as Spain, Italy and Ireland, meaning there are now no signs of robust manufacturing growth evident across the region.”
- In the U.S., the ISM data will attract the attention and it might be worth looking at the price components of it.
Hitherto, the U.S. inflation story was confirmed again yesterday with the personal consumer expenditure (PCE) deflator
but that has been about the services sector, more than the manufacturing sector.
As for the Fed starting raising rates over the next couple of months; all seems to be well on track so far.
Etienne "Hans" Parisis
is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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