The Investing Implications of Price Creep (Koesterich)

Friday, May 18th, 2012

Tuesday’s April Consumer Price Index (CPI) report was generally received as providing more evidence that inflation is under control. What many market watchers missed, however, was that core inflation, inflation excluding volatile food and energy prices, is displaying a worrisome trend for both consumers and investors — price creep, or a gradual and almost imperceptible increase in prices.

Here are just a few of the concerning core inflation data points:

1.)    At 2.31%, April’s core inflation figure was the highest since September 2008.

2.)    April was the seventh month in a row in which core inflation was above the Fed’s stated target of 2%.

3.)    April’s core inflation reading was nominally above the 20-year average.

To be clear, this doesn’t suggest that alarmist predictions for Weimar-style inflation are about to come true. As I’ve mentioned before, it’s hard to argue that inflation in the United States is about to accelerate in any meaningful way this year. Wage growth is slow, most of the US manufacturing sector is still struggling with excess capacity and up until late last year, the dearth of bank lending prevented any acceleration in the money supply.

That said, while double-digit inflation still looks fanciful, the rise in core inflation shows that prices are slowly creeping up and US consumers and investors are likely accepting, and becoming accustomed to, higher prices and higher valuations without even noticing. In other words, US consumers and investors may be the proverbial frog in the pot of slowly heating cold water and this is only likely to continue.

High unemployment will probably prevent any meaningful acceleration in wages, though the skills mismatch between employees and potential employers may still result in some wage acceleration. In addition, monetary conditions are no longer quite so innocuous when it comes to inflation. Bank lending to businesses – measured by commercial and industrial loan demand – is now rising 13% year over year and is close to a 3 ½-year high. Meanwhile, M2 has been growing at about 10% year over year since last summer. Though it still takes time for growth in the money supply to translate into inflation, the monetary environment is slowly turning.

For investors, there are a couple of implications:

1.)    Recognize purchasing power erosion: Even if inflation stabilizes at current levels, over the long term 2.3% inflation would still cause prices to rise by 50% in less than two decades time. In other words, inflation of this magnitude would cause a one-third erosion in purchasing power over the next 18 years. This is an important consideration for investors with large cash positions. And for bond investors – particularly those with large Treasury positions – this is one more reason to question the wisdom of accepting sub-2% yields for the next decade.

2.)    Consider equities and commodities: While uncertainty over Europe and Chinese growth are likely to keep volatility high this summer, investors should consider using near-term market weakness to add to long-term equity and commodity positions. To be sure, neither asset class is likely to offer double-digit returns over the long term. However, both may help investors keep their purchasing power from being slowly heated away.

Source: Bloomberg

Russ Koesterich is the iShares Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

Tags: 3 April, Acceleration, Cold Water, Consumer Price Index, Core Inflation, Cpi Report, Dearth, Energy Prices, Excess Capacity, Index Cpi, Inflation Data, Inflation Figure, Manufacturing Sector, Mismatch, Monetary Conditions, Money Supply, Target, Valuations, Volatile Food, Worrisome Trend
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Global PMI Scorecard: Services Sector Drives Acceleration in Global Growth

Monday, March 12th, 2012

Growth in global economic activity continued to accelerate for the fourth consecutive month in February. Highlights of the February PMIs are as follows:

• The JP Morgan Global Composite PMI increased to 55.5 from 54.5 In January.
• The JP Morgan Global Services PMI jumped to a rather robust 56.5 from 55.4 in January.
• Growth in the global manufacturing sector slowed markedly, mostly as a result of a sharp slowdown in the U.S.
• After stabilizing in January the Eurozone economy is sliding again as the situation in Italy, Spain and Greece has worsened.
• Growth in the BRICS countries is accelerating, especially in larger China.
• Pockets of robust growth are emerging:
  • U.S. non-manufacturing sector
  • India’s manufacturing and services sectors
  • Brazil’s services sector
  • South Africa’s manufacturing sector
  • Saudi Arabia’ overall economy.

Tags: Acceleration, Brazil, Cape Town, Economy, Global Economic Activity, Global Growth, Global Services, Greece, Jp Morgan, Manufacturing Sector, Pmis, Pockets, Postcard, Robust Growth, Saudi Arabia, Scorecard Services, Services Pmi, Services Sectors, Slowdown, South Africa
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On China and the End of the Commodity Super-Cycle

Wednesday, March 7th, 2012

China had a massive surge in its demand for commodities over the past decade, fueled by its housing boom and infrastructure investment boom. From 2000 to 2010, China’s imports (in value terms) of iron ore surged by 42.5 times, thermal coal 248 times and copper 16.2 times. During the same period, its production (in quantity terms) for aluminum jumped by 441.8%, cement 219.5% and steel 396.0%. It is the biggest consumer in virtually all commodity categories in the world. In Credit Suisse’s view, China was the key factor behind the global commodity supercycle. After a period of economic slowdown, all eyes are on China, hoping that the middle kingdom can return to its might in commodity demand. CS cuts through all the cyclical factors and asks whether China’s mighty demand for commodities will return in the medium term – their answer is ‘No’. As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline. Getting a massage simply does not use as much steel as building an airport.

Credit Suisse: Can China’s mighty demand for commodities return?

In this note, we ask whether China’s mighty demand for commodities will return in the medium term. We think the answer is “NO.”

• The golden age of infrastructure investment is behind us now.
• The golden age of the housing boom is behind us now.
• The golden age of exports is behind us now.
• The golden age of policy stimulus is behind us now.

but…

• One more leg of urbanization is expected.
• Further acceleration in policy housing is likely.

still…

• Trend growth in the next decade is projected at 7% to 8% versus 10.7% in the past decade.
• Growth engines will likely shift from exports and infrastructure to consumption.

which means…

• It should take less commodity consumption for each unit of GDP.

1) The golden age of infrastructure investment is behind us now.

After ten years of very aggressive build up of infrastructure, the penetration of highways, railways, airports and power stations has surged. Infrastructure investment is down by 25% in the 12th five-year plan from the 11th five-year plan, after adjusting for inflation. The actual moderation could be much bigger, in view of the very aggressive infrastructure investment by the local governments as part of the fiscal stimulus in 2009.

2) The golden age of the housing boom is behind us

Home ownership in China has reached 67% in the urban sector, above the world average now, and would be much higher if the rural area were included. Housing prices are getting out of reach for those who rely on a regular salary. An average person in China needs to spend ten years of salary to pay for an average apartment, versus the world’s average of about six years. The affordability ratio for local salary earners in most tier 2 and tier 3 cities is not much better.

3) The golden age of exports is behind us

Cyclically, exports seem to be on a rebound, but structurally, China’s competitiveness has been weakened because of surging salaries among the migrant workers and continued appreciation of the RMB. It may take ten years before the legend of the “world’s factory” disappears, but the best times are certainly behind us.

4) The golden age of policy stimulus is behind us

Beijing may launch some minor fiscal subsidies for consumption and reshuffle the tax code. Restrictions on bank lending has eased a little too. But there is no way that the government will launch another massive stimulus similar to what it did in 2009. The consensus among the decision makers is that the package of stimulus in 2009 did more harm than good to the long-term sustainability of growth.

What is not over and what may accelerate in the next few years?

1) Urbanization has another leg to go.

The industrialization model in China is changing. Over the past two decades, industrialization and modernization has been done through funneling rural labor to the coastal areas and export industries. In the next two decades, we believe industrialization and modernization will take place locally, at the village level. That would create new needs for commodities.

2) Policy housing construction will likely accelerate.

The central government realizes that high housing prices have become a source of social instability, so it is committed to provide subsidized housing to its citizens, with a target of building 36 million units during the 12th five-year plan (2011-2015). Progress was disappointing last year, as local governments have neither the money nor the incentive to deliver. We think policy housing construction is likely to accelerate over the next two years, though it is not clear who will pay the bill at this moment.

The big picture is that China’s trend growth is expected to slowdown to 7% to 8% over the coming decade, from 10.7% recorded in the previous decade. As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline. Getting a massage simply does not use as much steel as building an airport. In 2011, it took 71 million tones of steel for one percentage point of GDP growth – that is unheard of in the world’s modern history. We project that the ratio should moderate to 30-40 million tones for every percentage point of GDP growth by 2020. There will be cyclical ups and downs, which may affect China’s demand for commodities and commodity prices, but we think China’s supercycle for commodities is behind us.

Tags: Acceleration, Commodities, Commodity Categories, Commodity Consumption, Credit Suisse, Demand Cs, Economic Slowdown, Global Commodity, Growth Engines, Infrastructure Construction, Infrastructure Investment, Investment Boom, Iron Ore, Massive Surge, Medium Term, Propensity, Stimulus, Supercycle, Thermal Coal, urbanization
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Emerging-Market Stocks Have More Upside, But in Need of Correction

Tuesday, March 6th, 2012

In past articles I referred to the relationship between the MSCI Emerging Market Index expressed in Swiss francs and China’s CFLP Manufacturing PMI. By using arguably one of the world’s only non-fiat currencies the influence of currency movements on the MSCI Emerging Market Index is minimized.

The graph below illustrates just how out of line and inexpensive emerging-market equities were compared to the state of the world’s growth locomotive in the latter half of 2011 as the Eurozone debt crisis spooked investors. The market returned to rationality as the crisis eased in recent months, with the MSCI Emerging Market Index in line with February’s PMI of 51.0.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.

But where to from here?

After collapsing to 48.3 in November last year my seasonally adjusted CFLP Manufacturing PMI for China increased for the third consecutive month to 51.9 in February, with the drop in the reserve requirement rate (RRR) of Chinese banks filtering through to the economy. As the global economy is not out of the woods yet, the further cut in the RRR in February is likely to lend additional support to the seasonally adjusted PMI and therefore China’s economy in coming months.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

After being held in check by the Golden Week celebrations of China’s lunar New Year from the second half of January through mid-February, the unadjusted CFLP Manufacturing PMI is likely to receive a significant seasonal boost in March and April.

Sources: CFLP; Li & Fung; Plexus Holdings.

I therefore argue that the MSCI Emerging Market Index in terms of Swiss francs is likely to be underscored by the expected seasonal strength in the unadjusted PMI, as well as the acceleration in growth as reflected in the seasonally adjusted PMI, on the back of the reduced RRR of Chinese banks.

In a previous note I pointed out that changes in the direction of China’s banks’ RRR were soon followed by directional changes in the Shanghai Composite Index (SSEC 2410.45 �‘0.00%). In the following graph the cumulative change in the RRR was quantified where a 0.5% change in RRR amounts to approximately US$60 billion. When depicted against the MSCI Emerging Market Index in Swiss francs it is evident that changes in direction in the RRR are followed by major changes in direction of the MSCI Emerging Market Index in CHF. The cuts in the RRR in the last quarter of 2008 were followed by a bottom in the MSCI Emerging Market Index in the first quarter of 2009. The hike in the RRR in the first quarter of 2010 was initially followed by the topping out of emerging-market equities, while further increases led to a slump in equity prices. Although equity prices showed an improvement at the start of the fourth quarter last year the cut in the RRR pulled equity prices out of the doldrums.

Sources: NBSC; I-Net Bridge; Plexus Holdings.

The MSCI Emerging Market Index has significantly outperformed the MSCI World Index since December last year and is currently in line with China’s unadjusted CFLP Manufacturing PMI.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.

The Shanghai Composite Index in terms of U.S. dollars relative to the S&P 500 Index (SPX 1350.02 �“-1.05%) has moved completely out of line with the unadjusted CFLP Manufacturing PMI, though.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.

The appearance of another black swan will alter my view but as things are I am of the opinion that the rally in emerging-market equities is likely to continue over the next few months. That said, the market has had a huge run and, being overbought, it is in desperate need of consolidation or even a major correction. I continue to favor the Chinese stock market above other emerging markets and developed markets.

Tags: Acceleration, Celebrations, China Economy, China S Economy, Chinese Banks, Currency Movements, Debt Crisis, Emerging Market Stocks, fiat, Fiat Currencies, Global Economy, Locomotive, Lunar New Year, Msci Emerging Market, Msci Emerging Market Index, Nbsc, Pmi, Rationality, Rrr, Swiss Francs
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$10 Trillion In 2 years – ‘Over’ Abundant Liquidity And Expectations

Friday, February 24th, 2012

A funny thing happened while we all waited for the Fed to announce QE3. The rest of the world did it for them. Courtesy of Bloomberg’s excellent Economics Brief, and the n’th time, here is what a multi-trillion dollar liquidity expansion looks like even with the Fed running silent. And this is also what $10 trillion in 2 years pumped into the markets looks like. Wonder where the market gets its “spring step” from? Now you know. Thank you Economist PhD’s!

We do note that EUR strength recently (as the ECB appears done for now) and the acceleration of asset prices in Europe (bank stocks, credit etc.) appear to have done a good job of discounting the next LTRO already – and in fact are starting to retrace as LTRO 2 expectations are ratcheted back from the cajillion EUR level as the stigma continues to rise, ECB members raise concerns over dependency (banks are not forced to delever and also will not re-engage in the inter-bank lending market), and just like last year perhaps the ECB will hike rates to stall inflation fears (thinking of all-time record local currency gas prices as transitory is hard after a persistent 3 year trend higher).

Charts: Bloomberg

Tags: Acceleration, Asset Prices, Bank stocks, Banks, Bloomberg, Currency, ECB, Economist, Funny Thing, Gas Prices, Good Job, Inflation Fears, liquidity, Nbsp, Rest Of The World, Spring Step, Stigma, Th Time, Time Record, Trillion
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Current Market Volatility? Too Quiet

Friday, February 10th, 2012

When you’re watching horror movies, the time to worry is when things become eerily quiet. Last Friday, the market’s own measure of fear, the Chicago Board Options Exchange Volatility Index (VIX), hit its lowest level since last July. This is the financial equivalent of eerily quiet.

The VIX tracks the implied volatility on S&P 500 options. When investors are nervous, they’re more likely to purchase put protection, driving up the cost of options and implied volatility in the process. When markets are calm, or investors are too complacent depending on your point of view, the VIX tends to sink back into the teens.

At its current levels around 17 and 18, the VIX is modestly below its long-term average of 20 and is well below its 2011 peak of nearly 50. It’s also below the mid 30s it hit in October, when I argued that the VIX was too high and would likely moderate towards the high 20s or low 30s.

But while the VIX should certainly be lower now than it was six months ago, I believe its current levels seem too low. While market conditions have certainly improved since the fall, it looks like investors may have become a bit too at ease. With the risks to Europe lingering and most of the world still stuck in a lackluster recovery, a bit more caution — or fear — may be warranted.

Historically, economic activity, credit conditions and market momentum are three key drivers of implied volatility. All three have improved in recent months. Leading indicators have risen, market momentum has improved and credit spreads – measured by the spread between the 10-year note and an index of high yield bonds – have contracted by around 1%. Thanks to the improved general market environment, the VIX should certainly be lower than my October forecasts. However, in my opinion, a fair current value for the VIX would be around the low to mid 20s, higher than today’s levels. And unless we see a further acceleration in the economy and more spread tightening, I would expect volatility to post a modest rise in the coming months.

So assuming that volatility is set to rise, how should investors adjust their portfolios? First, remember that it’s the change in, not the level of, volatility that tends to impact asset prices. In an environment of rising volatility, investors would want to modestly lower their weight to market segments that are very sensitive to changes in volatility and raise their weight to less sensitive or lower beta instruments.

Practically, this could mean a modest reallocation out of high-yield fixed income towards investment-grade bonds, an asset class that currently appears to be a better relative value (potential iShares solution: LQD). While the spread between high yield and Treasuries has contracted by roughly 200 basis points since September, the spread between Baa bonds and Treasuries has been stuck at approximately 325 bps. Investors may also want to consider modestly increasing their weight to mega-cap equities. This segment of the market still trades at a significant discount to the broader market and is less sensitive than other segments to changes in volatility (potential iShares solutions: OEF, IOO, IDV, HDV).

Source: Bloomberg

Disclosure: Author is long LQD

Bonds and bond funds will decrease in value as interest rates rise

Tags: Acceleration, Caution, Chicago Board Options, Chicago Board Options Exchange, Current Market, Current Value, Economic Activity, Financial Equivalent, High Yield Bonds, Horror Movies, Implied Volatility, Last Friday, Leading Indicators, Market Environment, Market Momentum, Market Volatility, Mid 20s, Mid 30s, Options Volatility, Volatility Index
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Global PMI Scorecard: A turn for the better led by the U.S. and China

Monday, January 9th, 2012

The acceleration in global economic activity since the lows in October gained traction in December.

The JP Morgan Global Composite Index improved to 53.0 from 52.0 in November after falling to 51.4 in October. While the improvement in the composite PMI could virtually be attributed entirely to a significant improvement in business conditions in the U.S., the improvement in December was more broad based. The U.S. continues to lead the way, though, as my GDP-weighted Composite ISM PMI taking into account the Non-manufacturing Business Activity Index (the basis Markit uses to calculate the composite PMIs) instead of the PMI itself improved further to 55.7 from 55.4 in November. The manufacturing sector experienced accelerated growth increasing to 53.2 from 52.7. The ISM Business Activity Index remained unchanged at a relatively robust 56.2.

China, Brazil and India contributed significantly to the acceleration in global economic activity. China reversed the unseasonal slump in November in both the manufacturing and non-manufacturing sectors while Indian industries accelerated to near robust levels.

The contraction in the Eurozone’s private sector eased markedly for the second consecutive month. My calculated GDP-weighted PMI for the Eurozone rose to 48.3 from 47.2 in November and 46.6 in October. After stagnating in November, growth in Germany’s services sector is accelerating again while the services sector in France has stopped contracting. Elsewhere in the Eurozone the situation is dire to say the least, with the services sector in Ireland joining the contraction in the other debt-ridden Eurozone countries. However, the contraction in the Eurozone’s manufacturing sector, including France and Germany, continues. The acceleration in growth in the U.K.’s services sector from near stagnation in November is noteworthy.

The situation in Australia’ manufacturing and services sectors has stabilized while Japan is showing signs of acceleration in growth. The contraction in Hong Kong and Taiwan eased somewhat but the contraction in South Korea’s manufacturing sector deepened. In the Middle East, Saudi Arabia’s economy remains robust but growth in the Emirate states is faltering.

Note: ISM Non-manufacturing Business Activity Index used instead of Non-manufacturing PMI.

Sources: *Markit; **CFLP, Li & Fung, Plexus Asset Management; ***ISM, Plexus Asset Management; ****Markit, Plexus Asset Management.

Sources: Markit; CFLP*; ISM**; US Business Activity Index***; Plexus Asset Management.

Sources: Markit*; Li & Fung**; Kagiso***; Plexus Asset Management****; ISM*****.

Tags: Acceleration, Activity Index, Business Activity, Business Conditions, Composite Index, Contraction, Eurozone Countries, Global Economic Activity, Ism, Jp Morgan, Lows, Manufacturing Business, Manufacturing Sector, Manufacturing Sectors, Markit, Pmis, Second Consecutive Month, Services Sectors, Significant Improvement, Stagnation
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Outlook for Major Economies: Mixed Bag!

Wednesday, November 9th, 2011

With the October PMIs under the belt I had another look at what to expect on the economic front with regard to economic growth in the major economic regions.

The outlook for the Eurozone is grim. The recovery since the great financial crisis of 2008/2009 has been sub-par compared to what my GDP-weighted PMI for the Eurozone suggested. In the graph below the PMI indicates that the growth in GDP in the third quarter is likely to be in the vicinity of 0.8% compared to a year ago. That means that in the third quarter the economy shrank by 0.5% or at an annualized rate of 2%. The situation in the fourth quarter is significantly worse as year-on-year GDP growth is likely to be a negative 0.5%. This implies that the economy has contracted at a rate of 1.7% from the third quarter – a massive 4.7% annualized!

Sources: Dismal Scientist; Markit; Plexus Asset Management.

The Eurozone is therefore firmly in the grip of a recession. The German IFO Business Expectations Index indicates that the Eurozone economy will face further headwinds going into the first quarter next year.

Sources: Dismal Scientist; Markit; Plexus Asset Management.

In the U.S. the current level of the ISM GDP-weighted PMI (manufacturing and non-manufacturing) is consistent with year-on-year GDP growth of 1.5 – 2.0%. I expect year-on-year growth of about 1.75% in the fourth quarter – up slightly from 1.6% in the third quarter. On a quarter-on-quarter annualized basis I therefore expect a slight acceleration to 2.86% from 2.46% in the third quarter.

Sources: Dismal Scientist; Markit; Plexus Asset Management.

Japan’s GDP probably stopped contracting in the third quarter and may have expanded for the first time since the third quarter of last year. The manufacturing PMI also indicates a further but tepid expansion in the Japanese economy.

Sources: Dismal Scientist; Markit; Plexus Asset Management

The GDP-weighted CFLP PMI (manufacturing and non-manufacturing) for China indicates further weakening of GDP growth on a year-ago basis to below 9%.

Sources: Dismal Scientist; CGLP; Li & Fung; Plexus Asset Management.

The fortunes of China’s economy and especially the manufacturing sector remain closely tied to those of Japan.

Sources: CFLP; Li & Fung; Markit; Plexus Asset Management

The U.K. economy is heading for a recession. The GDP-weighted PMI that I calculate indicates that year-on-year GDP growth in the fourth quarter has stagnated, if not contracted. I estimate that the economy has probably contracted by approximately 1% or an annualized rate of more than 4% from the third quarter.

Sources: Dismal Scientist; Markit; Plexus Asset Management.

To summarize:

Japan: expanding at last

China: growth slowing

U.S.: slight acceleration in growth

Eurozone: in deepening recession

U.K.: entering recession

Tags: Acceleration, Asset Management, Business Expectations, Dismal Scientist, Economic Front, Economic Growth, Economic Regions, Eurozone, Expectations Index, Financial Crisis, Fourth Quarter, GDP, GDP Growth, Graph, Ism, Japanese Economy, Outlook, Pmi, Pmis, Recession, Vicinity
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China’s Manufacturing PMI Disappoints, Again

Tuesday, November 1st, 2011

The CFLP manufacturing PMI for October dropped to 50.4 from 51.2 in September. The weakening trend was broad based except in the case of stocks of finished goods, which edged upwards.

The lower PMI is contrary to the HSBC Purchasing Managers’ Index for China, which signaled a stronger expansion by rising to 51.0 in October from 49.9 in September.

The somewhat weaker trend in the CFLP PMI compared to September was in line with that of previous “normal” years (2008/2009 excluded due to the great financial crisis), but it is clear how weak the manufacturing sector is compared to previous years.

Sources: Li & Fung; CFLP; Plexus Asset Management.

Although the CFLP PMI Manufacturing Index is supposed to be seasonally adjusted, a further seasonal pattern is evident in the graph above. I therefore adjusted the CFLP PMI further to get a clearer picture of the underlying trend. On my seasonally adjusted basis the PMI actually improved from 49.9 to 50.6. The severe knock in global trade as a result of the Eurozone sovereign debt crisis in September is especially evident in my seasonally adjusted CFLP PMI.

Sources: Li & Fung; CFLP; Plexus Asset Management.

The interrelationship between the manufacturing sectors in China and Japan continues as, according to Markit, Japan’s manufacturing PMI posted 50.6 in October compared to 49.3 in September. According to Markit the acceleration in Japan’s manufacturing sector occurred despite the fact that new export orders contracted for the 8^th consecutive month mainly as a result of weak demand from China and adverse exchange rate factors. Perhaps trade between Japan and China is picking up?

Sources: Li & Fung; CFLP; Markit; Plexus Asset Management.

Stock levels in China’s manufacturing sector remain high compared to the level of new orders. The ratios of stocks of major inputs compared to new orders and stocks of finished goods to new orders point to a relatively unchanged CFLP Manufacturing PMI in November as the ratios tend to lead the PMI by one month.

Sources: Li & Fung; CFLP; Plexus Asset Management.

Sources: Li & Fung; CFLP; Plexus Asset Management.

November is historically a somewhat stronger month than October and a slight uptick in November’s CFLP PMI can therefore be expected. That is unless Japan’s manufacturing sector accelerates further.

Sources: Li & Fung; CFLP; Plexus Asset Management.

But what are the markets saying? The Shanghai Composite Index is pointing to a relatively unchanged CFLP Manufacturing PMI at this stage.

Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.

With input prices contracting the threat of higher inflation has receded. That, together with the significant lower growth in the manufacturing sector, may compel the Chinese authorities to relax monetary policy and cut rates soon.

Tags: Acceleration, Asset Management, Debt Crisis, Exchange Rate, Export Orders, Financial Crisis, Finished Goods, Global Trade, Interrelationship, Manufacturing Sector, Manufacturing Sectors, Markit, Pmi, Previous Years, Purchasing Managers Index, Rate Factors, Ratios, Seasonal Pattern, Sovereign Debt, Stock Levels
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Global Manufacturing PMI (Sept 2011): U.S. Shines in Suffering Global Manufacturing Sector

Wednesday, October 5th, 2011

Growth in the global manufacturing sector is on the brink of contraction. The global manufacturing PMI that I calculate on a GDP-weighted basis for the major economic regions fell to 50.1 in September from 50.4 in August, while the JP Morgan Global Manufacturing PMI fell to 49.9 from 50.1. The U.S. ISM Manufacturing PMI masks the state of the manufacturing sector elsewhere around the globe, though. The gauge jumped to 51.6 in September, indicating acceleration in growth from a paltry 50.6 in August.

While Germany is still showing signs of growth the recession in the rest of the Eurozone’s manufacturing sector is deepening. However, it seems as if the contraction in Italy is easing somewhat, but France, the second largest economy in the Eurozone, is sliding fast. In contrast, the manufacturing sector in the U.K. has managed to grow again after contracting in August. The cold spell has spread to emerging Europe as well, with Poland leading the way as growth in its manufacturing sector is close to stalling. Turkey was the exception as its manufacturing sector is growing again.

Asian countries are also suffering. China was the major disappointment as the CFLP Manufacturing PMI only managed to rise by an abysmal 0.3 percentage points to 51.2 in a month that is normally a very strong month from a seasonal perspective. The result was that my seasonally adjusted CFLP PMI fell 2.1 percentage points to 50.1 and therefore indicates that growth in China’s manufacturing sector has stagnated. It had a severe ripple effect on the rest of Asia. Growth in India’s manufacturing sector slowed sharply, while the contraction in Taiwan, South Korea and Australia deepened.

Russia and South Africa held up reasonably well in the other BRICS countries but the contraction in Brazil’s manufacturing sector quickened.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Tags: Acceleration, Asian Countries, Brazil, BRICs, Brink, Cold Spell, Contraction, Disappointment, Economic Regions, Emerging Europe, Eurozone, India, Ism Manufacturing, Jp Morgan, Leading The Way, Manufacturing Sector, Percentage Points, Plexus Asset Management, Recession, Ripple Effect, Sector Growth, South Korea
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