Sunday 25 February 2018

Eurozone’s manufacturing performance diverges from the Americas & Asia

Highly detailed Earth, illuminated by moonlight. The glow of cities sheds light on the detailed exaggerated terrain and translucent water of the oceans. Elements of this image furnished by NASA
Highly detailed Earth, illuminated by moonlight. The glow of cities sheds light on the detailed exaggerated terrain and translucent water of the oceans. Elements of this image furnished by NASA

Richard Ramsey

A key theme within financial markets at present is one of central bank policy divergence within the US and the Eurozone.

On 16th December the Federal Reserve is expected to raise interest rates (reduce its monetary policy stimulus) barring a significant downside surprise with Friday’s nonfarm payrolls. Meanwhile the ECB is expected to unveil more monetary policy stimulus tomorrow. However, yesterday’s manufacturing PMIs ironically highlighted that the Eurozone is recovering while Asia and the Americas are slowing. The Eurozone manufacturing PMI rose to a 19-month high in November. Japan remains the one bright spot in Asia.

Meanwhile the once mighty BRIC, Brazil, saw manufacturing contract last month (43.8) at its sharpest rate since March 2009. Remember with the PMIs 50.0 denotes the threshold between expansion (>50) and contraction (<50). The key manufacturing PMI yesterday was the US ISM report. US manufacturing was flat in September and October. In yesterday’s survey, however, US manufacturing posted its first contraction (48.6) in three years and its weakest reading since June 2009. The new orders index contracted at its fastest pace since August 2012. Interestingly, the Federal Reserve has never hiked interest rates when the ISM manufacturing survey has been below 50 (contracting).

Fastest pace of growth since March

The pace of UK manufacturing growth slowed more than expected in November according to the manufacturing PMI. However, the slowdown was coming off October’s 16-month high of 55.2, which looks to be something of an outlier. If the October reading is ignored, November’s outturn of 52.7 still represents the fastest pace of growth since March. Looking at the sub-components of the PMI it was a similar story. New orders growth eased from 56.6 to 54.1 but the latter still represents the fastest rate of growth since March.

Meanwhile export orders growth improved in November with the 52.3 reading representing the fastest rate of growth since August 2014. Employment remains the one weak spot within UK manufacturing with the employment index broadly flat in three of the last four months. Today we have the construction PMI. The UK construction industry has recorded strong growth of late. The consensus opinion is for October’s robust rate of growth (58.8) to be broadly maintained in November.

The Bank of England’s MPC next decides on its monetary policy settings next week. While no change is expected, talk of no action until 2017 was premature according to one of the BoE’s deputy governors. Sir Jon Cunliffe, speaking in an FT interview said that the next move in interest rates will be a rise. “The next move, in my view, is up” he said, echoing the words of BoE governor Carney. “I also believe the economy has come out of a pretty wrenching period and a number of the indicators on both the supply and the demand side are much harder to judge than when I was on the MPC as the Treasury observer…..I think we see signs of pay growth coming back in the economy and we’re seeing signs of productivity coming back, but . . . I’m datadependent.”

No contingency plans for 'Brexit'

Another potential area for action in 2016 concerns the UK’s status within the EU. Next year will see an EU In/Out referendum. According to a story in the Financial Times, the UK Chancellor has revealed that the UK government will not make any contingency plans for a Brexit, insisting that ministers were focusing on keeping Britain in a “reformed” EU.

The stronger dollar is clearly not helping US manufacturing. Yesterday’s weaker than expected ISM manufacturing report has led to some weakening of the greenback. Momentum was already moving against the dollar before yesterday afternoon’s release. EUR/USD almost touched $1.064 last night with the currency pair back at $1.062 as I write. Sterling’s cause was not helped by weaker than than expected manufacturing PMI, although the headline was worse than the positive underlying trends suggest. Cable is down from $1.51 to $1.506 over the last 24 hours or so. Meanwhile EUR/GBP has been pushing higher over the last 24 hours and has been testing 70.6p over the last hour or so.

Looking at today’s releases we have the latest CPI inflation estimate for the Eurozone. This is expected to rise from 0.1% y/y in October to 0.2% y/y. This is still well below the ECB’s close to but below 2% y/y. The focus in the US switches to the labour market ahead of Friday’s all important nonfarm payrolls release. The ADP private sector employment report is due this afternoon with a net gain of 190k jobs pencilled in for November. The Federal Reserve’s Beige Book of business conditions across the US is also due for release tonight.


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