“Counting on the Fed to perpetually float returns is a mug’s game”

When looking at the current health of world stock markets, it is critical that we bear in mind the structural paradigm in which we observe: the only reason the financial system remains in place and markets are “healthy” is the vast amounts of government and central bank support.   The title to this post comes from Richard Fisher President of the Federal Reserve Bank of Dallas:  He also makes the following comments: Continue reading

How wide are the recovery bands?

Do the recent improvements in US manufacturing and non manufacturing PMI data imply that the US economy has established a sustainable platform for growth, and by implication is there sufficient support from the rest of the world?  

PMI data only provides a reference point as to whether things are improving or getting worse. They do not provide a guide as to future growth, just that at any given point in time, conditions are either improving or worsening, or slowing or gathering momentum. Continue reading

Global PMI

JP Morgan’s October global PMI saw a marginal improvement from 49.8 to 50.  What was more relevant in the context of the importance of trade to global economic restructuring was the decline in new export orders.

Conditions in the global manufacturing sector remained broadly stagnant in October. Levels of production and new orders fell slightly over the month, while new export orders declined at the quickest pace for almost two-and-a-half years.

Among the largest manufacturing nations, new export orders stagnated in the US, and fell in Japan, the Eurozone (steepest in 28 months), the UK, India, South Korea, Taiwan and Brazil. China reported a modest increase, as did Russia.

Underlying the lacklustre performance of global manufacturing was a reduced inflow of new business. The level of new work received contracted for the third month running in October, although the rate of decline eased over the month. The reduction was largely centred on the European economies, with the euro area and the UK seeing new business drop to the greatest extents in around two-and-a-half years.

Slow economic growth with economies balancing on the edge of recession implies an inertia, a lack of energy sufficient to rebuff the strong negative forces of the ongoing crisis. An element of momentum is needed in order for economies to absorb the current shocks to the system.  In all, growth in all its many forms (employment, new orders, growth in disposable income, loan growth etc) is far too weak to withstand the type of economic stress we are encountering.  

You are at your weakest point as you strive to stand!  A little knock, let alone a juggernaut is all it takes to push you back down.

Manufacturing PMI, US & Global

Manufacturing is an important indicator given that indebted developed markets, going forward, depend on exports to a much greater extent than before, and emerging and developing manufacturing exports and export orders to developed economies represent a gauge of the health of developed domestic markets.  

In 2008/2009, the collapse in exports and manufacturing was a key characteristics of the crisis.   


Manufacturing ISM showed a decline to 50.8 from an expected 52.1.   While the new order index apparently rose by 2.8 points (based on the ISM methodology, one would have expected a decline), the new order diffusion index actually deteriorated.


Those reporting a worsening increased, those reporting no change stayed the same and those reporting an increase declined.   Based on the ISM methodology of 100% of positive responses + 50% of those staying the same, the new order component should have been close to 48.5.  New order momentum is negative.  Additionally in October inventory accumulation dynamics worsened supporting the decline in the production index. 


UK Manufacturing PMI

“The UK manufacturing PMI fell sharply back into contraction territory in October. The most worrying aspect of the survey is the trend in new orders, which declined at the quickest pace since March 2009. Companies are facing tough conditions in both domestic and overseas markets, meaning that output is increasingly being sustained through the depletion of backlogs of work. A marked recovery in the replenishment rate of order books is needed to prevent the renewed manufacturing downturn becoming embedded.


“Although the HSBC Manufacturing PMI index rose modestly from 45.5 last month to 46.5 in October, the headline index remained below the 50 mark and indicated a contraction in the manufacturing sector. This is the fifth consecutive month that this index has indicated a contraction in industrial activity, and reinforces the idea that Brazil is already experiencing an industrial recession.


The headline HSBC Czech Republic Manufacturing PMI is a composite single-figure indicator of manufacturing performance. It moved lower for the second successive month in October, from 52.3 to 51.7, the lowest since December 2009. The downward movement in the PMI reflected four of its five components, the exception being suppliers’ delivery times.
New orders registered their weakest rise since August 2009, when the current sequence of growth started. Data suggested that export markets were especially weak, as new export business rose at a negligible pace since the previous month. A number of firms reported weakness from the crucial German market.


The PMI edged up from 50.0 to 50.4 in October. This signalled the first overall improvement in business conditions in the manufacturing sector since June.  The rate of growth in new business received by Russian manufacturers was muted, and well below the survey’s long-run trend. This partly reflected external weakness – new orders from export markets rose only marginally – as well as lacklustre domestic demand.


the overall health of the manufacturing sector – posted 52.0 in October, up from September’s 50.4. The latest reading pointed to an improvement in business conditions in the Indian manufacturing sector. The rate of growth was modest, but stronger than in the previous survey period


the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.0 in October, up from 49.9 in September, signalling an improvement in operating conditions for the first time since June. Nonetheless, the index reading was below the long-run trend (52.1), and at a level indicative of a modest rate of growth.
Manufacturing production in China increased for the third successive month during October, with the pace of growth reaching a five-month high. Behind the latest increase in manufacturing output was a renewed expansion of new business. The rate of new order growth was solid, and the fastest since May. Respondents indicated that improved demand conditions had contributed to the rise in new orders


43.7 in October, down from 44.5 in September. The latest reading pointed to a worsening in business conditions that was the sharpest since January 2009.   New business received by manufacturers in Taiwan decreased substantially during October. This was primarily driven by a reduction in demand, both domestically and overseas, due to weakening global economic conditions. Overall new order volumes have now fallen in each of the last five months, although the latest decrease was the strongest in that period.


The decline in manufacturing activity continued in October, albeit at a slower pace. The seasonally adjusted Australian Industry Group-PwC Australian PMI® rose 5.1 points to 47.4. (Readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decline.) 
■ The decline in manufacturing activity was particularly pronounced in the clothing and footwear sector. In addition, sectors linked to the construction industry, including wood products and furniture, fabricated metals and construction materials continued to exhibit substantial weakness.
■ Most survey respondents remained cautious about the outlook for manufacturing, citing the negative influences of slowing sales, the strong Australian dollar, cheap import substitutes, and a weak construction market. Concern with respect to skilled labour shortages and the introduction of the carbon tax was also cited.

South Korea

South Korean manufacturing sector business conditions deteriorated again in October. This was highlighted by the HSBC South Korea Manufacturing PMI® posting 48.0. The latest reading pointed to a third successive worsening of business conditions in the South Korean manufacturing sector. However, up from September’s reading of 47.5, the rate of deterioration slowed slightly.
Manufacturers in South Korea reported a solid reduction in new business received during October. The rate of contraction was consistent with that recorded in the previous survey period. New orders received from export markets also fell, but at a slower rate. Overall, anecdotal evidence suggested that softening global economic conditions had led to a reduction in demand.


The seasonally adjusted Markit/JMMA Purchasing Managers’ Index™ (PMI™) posted 50.6 in October, up from 49.3 in September, signalling a marginal improvement in manufacturing sector operating conditions.“Japanese manufacturers registered renewed production growth in October, despite further declines in new orders from both domestic and external clients. Weak demand from China and ongoing yen strength were again cited as key factors contributing to falling export sales.  “Despite easing to an 11-month low, the pace of input cost inflation was solid, and contrasted with a third successive month of output price discounting.  These findings again signal that strong competitive pressures are restricting the ability of firms to pass on higher costs to clients.” ….Those respondents that registered a drop in foreign order levels attributed this to weak demand from China and adverse exchange rate factors.


The headline RBC PMI – a composite indicator designed to provide a single-figure snapshot of the health of the manufacturing sector – posted 53.7 in October, which is down from 55.0 in September and marks a three-month low.