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Tuesday 21 November 2017

Daily Market Update: Global PMIs signal manufacturing slowdown continues in September

Richard Ramsey

Financial markets primary concern this week focuses on the scale of the global manufacturing downturn.

Yesterday’s flash manufacturing PMI for China signaled the fastest rate of contraction in 6½ years. This provided Asian equity markets with their worst day’s trading in months. The equivalent survey for the Eurozone revealed a slowdown in the rate of growth from 52.3 last month to 52.0 for September. This was in line with expectations. Remember with PMIs ‘50.0’ is the threshold between expansion (>50) and contraction (<50). The French manufacturing PMI climbed back above the 50 threshold for the first time in three months.

However, the 50.4 outturn only signals marginal growth. The German manufacturing PMI still posted a more respectable rate of growth (52.5) although this was down on the August figure of 53.5. The services PMIs reported a similar story with activity in France exceeding expectations whereas the converse was true for Germany. Overall, the Eurozone services PMI saw the rate of activity ease from 54.4 in August to 54.0 in September. This was slightly weaker than the 54.2 consensus.

Japanese financial markets have reopened this morning following a three day holiday and are effectively playing catch-up with their Asian counterparts. The Nikkei 225 index has ended its first session of the week 2.8% lower. Mazda, Toyota and Honda stocks all pushed lower which follows the general slide in global auto stocks following VW’s emission scandal. Yesterday the CEO of VW Martin Winterkorn resigned after the worst scandal in the group’s history has wiped 30% of VW’s share price.

The flash Japanese manufacturing PMI released this morning signaled a slowdown in the pace of manufacturing activity. The Nikkei flash manufacturing PMI slipped from 51.7 in August to 50.9 for September. The latest print was weaker than the 51.2 consensus amongst economists. Within the survey the export orders component fell the most in almost three years. Later today Shinzo Abe, the Japanese Prime Minister, will lay out his plans for the rest of his term. Almost three years after his election, his Abenomics plans of fiscal and monetary stimulus has done little to re-inflate and revive the world’s third largest economy which appears to be on the brink of recession again. Meanwhile Japan’s deputy economy minister said yesterday that achieving 2% inflation by next September may be delayed due to the Chinese economic slowdown and related slide in commodity prices. The price of a barrel of Brent crude oil has slipped by 2% over the last 24 hours from $49pb to $48pb over the last 24 hours.

Markit’s flash manufacturing PMI was the key release in the US yesterday. The September rint remained unchanged at August’s 22-month low of 53.0. However, this was slightly better than market expectations. Nevertheless, the rate of manufacturing growth is still fairly tepid. There is a raft of US data scheduled in today’s session with weekly jobless claims, new home sales and durable goods orders all in focus. Janet Yellen is also due to deliver a lecture at the University of Massachusetts tonight. Whilst there is no Q&A or press conference scheduled, the Fed Chair may use the opportunity to throw more light on last week’s FOMC decision not to raise rates. Yesterday Atlanta Fed President Dennis Lockhart, revealed that he voted for no change to allow more time to evaluate the financial market turmoil that occurred last month. Lockhart termed it as a “cautionary approach, a prudent risk management”.

On the currency markets the single currency has gained 0.6% against the greenback over the last 24 hours. EUR/USD has increased from $1.112 to $1.119 over this period having briefly breached $1.12 a short time ago. The euro has also gained against sterling with EUR/GBP rising from 72.6p to 73.2p over the last 24 hours. The euro has been helped by comments from the Bundesbank President Jens Weidmann who said yesterday ‘exaggerated’ deflation fears have now receded and monetary policy should look through inflation swings caused by energy prices because they are temporary and anyway help the economy by boosting purchasing power. He added that in contrast to the monetary-policy debate in January, the economic recovery in the euro area has solidified. Today’s key release in the Eurozone will be the influential German IFO survey.

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