Overnight Sentiment: A Tale Of Chinese And European PMIs... And Greece
There were two major datapoints overnight: the first one came out early in the session, when the Chinese Flash HSBC PMI (not the official one), printed in contraction territory for a 12th consecutive month but jumped sufficiently to 3 month highs to give the algobots hope that China may be turning (it isn't: China, like the US has a major political event early November and all its data is more manipulated than ever). Regardless, this sent future rising to session highs until virtually yesterday's entire gap down was eliminated. The euphoria continued until several hours later we got composite European (as well as the most important German PMI data, and to far less relevant extent France, which always has been the dynamo in European economic growth), manufacturing and services PMI, both of which missed expectations or declined substantially, reaffirming that the German economy is getting dragged down more and more into recession even as continues funding the rescue of the periphery. As the chart from Markit below shows, German PMI is hinting at a solidly negative German GDP print, further confirmed by the German IFO business print which came at 100, a drop from 101.4 and below expectations of 101.6. Other secondary macroeconomic data was just as bad, which explains why futures are now well on their way to dropping back to their lows. Finally, today we get the FOMC statement, which will be much ado about nothing, and will merely serve as an appetizer to the December FOMC meeting, when Goldman (and Zero Hedge) now expected the Fed to expand unsterilized monthly monetization to increase from $40 billion to $85 billion (more on the shortly).
Yet perhaps the biggest shift in mood has been coming out of our old friend Greece, where Troika negotiations, largely under the radar, are progressing from bad to worse, where the bond buyback plan was scuttled last night (as ZH reported sending Greek bonds 70 bps wider on the day and rising), and where the probability of another flash election, which can crash the precarious European balance in an instant, is rising with each passing day.
German GDP vs PMI: self-explanatory.
More on Europe's PMI disappointment via Goldman:
The Euro area Composite flash PMI declined slightly from 46.1 to 45.8 in October, below our and the consensus expectations of a small uptick. The decline was driven by a fall in the manufacturing PMI (from 46.1 to 45.3). The services component edged up by 0.1ppt to 46.2. The country breakdown reveals a reversal from last month's pattern: a deterioration registered in Germany was partially offset by improvements in its French counterpart. However, the level of the German composite PMI remains much higher than France's. The Euro area Composite PMI has been broadly stable at around 46.0 since April, suggesting a decline in GDP of around -0.1%/-0.2%qoq in Q3.
1. The Euro area Composite PMI declined slightly, defying consensus expectations of a small increase (BBG Cons: 46.5). The decline was driven by a fall in the manufacturing sector (by 0.8 point to 45.3). The services component increased marginally from 46.1 to 46.2.
2. The breakdown of the survey shows that the decline in the Euro area manufacturing PMI was driven by a drop in employment (from 47.7 to 46.1), new orders (from 43.5 to 43.1) and output (from 45.9 to 44.8). For services, the headline index – which is not an aggregate of the sub components – showed a small tick up from 46.1 to 46.2. However, the sub-indices painted a somewhat mixed picture, with employment (45.9 after 47.5) and incoming new business (from 43.9 to 44.8) improving, while business expectations deteriorated (from 49.4 to 47.8).
3. In addition to the Euro area aggregate, flash PMI estimates are also released for Germany and France (see Charts 1-3 below for country developments). The gap between Germany and France's performances has narrowed somewhat after last month's sharp widening. The German Composite PMI eased from 49.2 to 48.1, while its French counterpart increased from 43.2 to 44.8. Looking forward, we expect the relative strength of Germany compared with France to continue in the coming months. While French concerns are mainly domestic, risks to the German outlook are mainly of external nature. According to Markit, French panel members reported "an unfavourable business climate, budget cuts and the lack of visibility over the next 12 months" as factors weighing on sentiment. In Germany, companies surveyed cited weakness in exports to southern economies and subdued demand in the auto sector as main concerns.
4. The Euro area Composite PMI has been flat at around its current level since April, suggesting a stabilisation of momentum at a low contractionary level in recent months. Using a pre-crisis sample, past correlation with the Euro area Composite PMI would suggest Euro area GDP growth of -0.1/-0.2%qoq in Q3 (see Chart 4). Our Euro area Current Activity Indicator– which distils information from a wider range of different activity indicators into a broad measure of economic activity– is consistent with a contraction in GDP growth of 0.3%qoq.
Flash PMIs for October:
- Euro area: Composite PMI: Actual: 45.8, Prior: 46.1, Cons: 46.5
- Euro area: Manufacturing PMI: Actual: 45.3, Prior: 46.1, Cons: 46.5,
- Euro area: Services PMI: Actual: 46.2, Prior: 46.1, Cons: 46.4,
- Germany: Composite PMI: Actual: 48.1, Prior: 49.2
- Germany: Manufacturing PMI: Actual: 45.7, Prior: 47.4, Cons: 48.0,
- Germany: Services PMI: Actual: 49.3, Prior: 49.7, Cons: 50.0,
- France: Composite PMI: Actual: 44.8, Prior: 43.2
- France: Manufacturing PMI: Actual: 43.5, Prior: 42.7, Cons: 44.0,
- France: Services PMI: Actual: 46.2, Prior: 45.0, Cons: 45.4,
What else is on the docket for today (via SocGen):
They are very rare the sequences when stocks get pummelled before a Fed FOMC meeting. Confidence and hope of support from the FOMC tends to buttress risk assets but it is exactly the opposite that has been going on since Friday with equity indices shedding over 2% in three days. The precise cause for the sell-off in difficult to pinpoint. Macro data has not been outright dismal. Japanese trade data have been worsening for a while and news of a 0.5% qoq contraction in Spanish Q3 GDP is not really ‘news' either. There was an element of disappointment related to the EU summit, but perhaps we should read more into the potentially more destabilising factor (in addition to the Q3 earnings from corporate America): fresh turmoil in the Greek coalition. Pasok leader Venizelos called on PM Samaras to ‘contact his EU partners' after it emerged that Pasok declined to put labour market reforms on the negotiating table. Dimar leader Kouvelis said that the Troika's labour demands are unacceptable. One wonders how much negotiation room there is but EUR13.5bn spending cuts will have to be agreed before the next bailout tranche is released. The EU is unlikely to renege on its demands. The collateral damage of the worsening market conditions is not leaving Spain unaffected and the climb in bono yields will just put that little bit more pressure on Madrid.
Focus today is on the FOMC meeting where speculation has been building that the statement could drop the ‘extended period' language in favour of numerical targets for inflation and unemployment. ECB president Draghi will brief the German Bundestag on the crisis and Germany's IFO survey will give offer the latest snapshot of business confidence. If the result from France is any guide, we should brace for more bad news and participants will be more inclined to fade rallies in USD/JP
And a complete overnight wrap up from Deutsche Bank:
Overnight markets are trading mostly stronger, led by the Hang Seng (+0.2%) and Nikkei (+0.3%). Most other indices are off the intraday lows following the release of China’s HSBC flash manufacturing PMI which came in at 49.1 (vs 47.9 previously), the highest reading in three months. The new orders component of the index hit a 6-month high, which is helping the Shanghai Composite outperform overnight at +0.4%. The AUDUSD is up about 0.5% overnight following a higher than expected Australian CPI print (+1.4%qoq vs 1% expected), dampening expectations of a November rate cut.
Today we have the important flash/prelim PMIs to contend with. However, there should be some relief in these numbers over the next couple of months purely due to the rally in peripheral spreads. We’ve included a graph in today’s EMR showing Spanish spreads and Spain’s PMI over the last couple of years. Given the relationship here one would expect some pick-ups in the PMIs for a while even if it’s counter to any longer-term weakness.
Clearly we won’t see Spain or Italy’s PMI today as flash estimates aren’t compiled for these countries but we will see an overall number for Europe (46.5 expected vs 46.1 last month manufacturing wise), Germany (48 vs 47.4 last month) and France (44.0 vs 42.7 last month). The FOMC’s meeting will also be a key event to watch today after some market chatter yesterday of the possibility of changing the extended period language into nominal GDP targeting. For the record, DB’s Peter Hooper noted that the Fed will have no inclination to make any notable changes today following the QE3 announcement last month. Maintaining a low profile given the upcoming Presidential election is also a reason for keeping the status quo intact. Nevertheless, for markets FOMC days tend to be positive for stocks. A NY Fed staff research paper noted that since the FOMC began announcing its monetary policy decisions in 1994, US stocks have experienced large excess returns in the 24 hours preceding these announcements. These abnormal returns account for more than 80 percent of the U.S. equity premium over the past seventeen years. Other major international equity indexes have experienced similar abnormal returns before FOMC announcements. For 2012 alone, our calculation shows that the S&P 500 on average returned +0.87% on FOMC days. The index has also seen a cumulative return of +5.20% (of the +12.4% YTD returns for 2012) on FOMC days this year.
While on the subject of the FOMC, the New York Times reported that Ben Bernanke will not stand for a third term even if President Obama wins the November 6th election. Bernanke’s current terms ends on Jan 2014. The news didn’t help gold prices, which finished 1.21% lower, in its largest one-day loss since July 10th.
European markets had an equally weak day with the Stoxx600 down 1.67%, its biggest one-day loss since July 23rd. In the credit space, Xover (+22bp) and European Main (+5.75bp) indices were both wider. Spanish 10yr yields added 13bps to close at 5.624%, not helped by Moody’s downgrade of five Spanish regions the day before. The timing of the downgrade wasn’t great for the Community of Madrid, which cancelled a debt issue on Tuesday due to market conditions. Madrid has the second-highest credit rating of Spain’s 17 regional governments. According to the FT, the debt was offering a 7.8% yield for a 7.5yr maturity and the cancellation may mean that Madrid’s regional government will seek aid from the central government’s EUR18bn regional bailout fund. Although according to Reuters, the EUR18bn regional bailout fund will need to be expanded to accommodate further bailout requests from the regions.
Also something worth keeping an eye on is a complaint against the ESM brought by Thomas Pringle, an independent member of the Irish parliament, that reached the EU Court of Justice yesterday (Bloomberg). The complaint alleges that the ESM violates the “no-bailout provision” under EU law. The Court is expected to rule on a legal challenge to the ESM by the end of the year. Finally, in a reminder of the mood amongst some German lawmakers, German FM Schauble offered a relatively pessimistic assessment of the Eurozone debt crisis, saying at a conference in Berlin yesterday that he wasn’t sure the “worst of the crisis is behind us” (Spiegel).
Looking at the day ahead, the focus will be on the Euro area and US flash PMIs. We may get some OMT-related headlines from Draghi’s closed-door meeting with members of the Bundestag which begins at 1pm London time. In terms of other data, the German IFO survey is due while in the US we get new home sales. It will be a relatively busy day for earnings with 43 S&P500 companies reporting including the likes of Lockheed Martin, Boeing and AT&T.
The FOMC’s statement is scheduled for 7:15pm London time.
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