March Starts Off With A Whimper As Global Economic Data Slump
Update: Eurozone unemployment rate rises to a record 11.9%, expected was 11.8%, while UK manufacturing PMI plunges from 50.5 to 47.9, on expectations of an increase to 51.0.
If the new year started off with a bang, March is setting up to be quite a whimper. In the first news overnight, we got the "other" official Chinese PMI, which as we had predicted (recall from our first China PMI analysis that "it is quite likely that the official February print will be just as weak if not more") dropped: while the HSBC PMI dropped to 50.4, the official number declined even more to just barely expansionary or 50.1, below expectations of a 50.5 print, and the lowest print in five months. This was to be expected: Chinese real-estate inflation is still as persistent as ever, and the government is telegraphing to the world's central banks to back off on the hot money. One country, however, that did not have much hot money issues was Japan, where CPI declined -0.3% in January compared to -0.1% in December, while headline Tokyo February data showed an even bigger -0.9% drop down from a revised -0.5% in January. Considering the ongoing surge in energy prices and the imminent surge on wheat-related food prices, this data is highly suspect. Then out of Europe, we got another bunch of PMIs and while French and Germany posted tiny beats (43.9 vs Exp. 43.6, and 50.3 vs 50.1), with Germany retail sales also beating solidly to cement the impression that Germany is doing ok once more, it was Italy's turn to disappoint, with its PMI missing expectations of a 47.5 print, instead sliding from 47.8 to 45.8. But even worse was the Italian January unemployment rate which rose from 11.3% to 11.7%, the highest on record, while youth unemployment soared from 37.1% to 38.7%: also the highest on record, and proof that in Europe nothing at all is fixed, which will be further confirmed once today's LTRO repayment shows that banks have no desire to part with the ECB's cash contrary to optimistic expectations.
And with Europe done, we now turn our attention to the US, where the sequester is, at least for now, supposed to be enacted at midnight and will assure a substantial scalp in terms of economic growth is imminent. But first we have to go through today's manufacturing ISM which should provide yet another headfake with a bad number being good, and a good number better. Although if past is prologue, with the Chicago PMI solidly beating expectations, the baffle with BS regime will do all in its power to have the manufacturing ISM miss and keep everyone on their algorithmic toes.
SocGen recaps Asia's overnight action:
Asian data on Friday came in mostly on the soft side. Japanese CPI showed every sign of continued deflation, despite the sizeable yen depreciation in the past few months. South Korea February trade surplus was much bigger than expected, thanks to weak imports, which adds to the evidence of subdued domestic demand. Furthermore, China official manufacturing PMI followed the surprisingly weak flash HSBC report, falling to 50.1. However, we think it was partly due to the long holidays. Chinese stock markets didn't take the news well and retreated notably. Next Monday we expect Korea's CPI to remain soft in February and limited improvement in Australian building approvals.
China's February official manufacturing PMI didn't escape the holiday drag
Following the surprisingly weak flash HSBC PMI, the official manufacturing PMI also disappointed and fell for the second month in a row to 50.1 in February from 50.4 in January. However, if we add one more seasonal adjustment to the series, we get 50.6 for February, down modestly from the adjusted value of 50.8 in January but same as in December. This is probably a more accurate picture.
In unadjusted terms, new orders were down by 1.5 points to 50.1, while four other major sub-indices that enter the calculation of the headlines largely held up despite the impact of the Chinese New Year. Production and employment each moved lower by only -0.1 point. The reading of supplier delivery times declined from 50 to 48.3, implying stronger demand. Although the input inventory index dropped by 0.6ppt to 49.5 and dragged down the headline, it doesn't necessarily mean that manufacturers were less confident of future demand. Especially, finished goods inventories were down further to a 25-month low of 46.6, suggesting a quickening in sales.
The bottom line is that the economic recovery is not yet over, although it is not a strong one. We think the March PMI reports (due on 1 April) should regain the face-value loss in January and February. Before hand, we expect the releases on 9 March of industrial production and fixed asset investment data for January and February combined to be more upbeat than February PMIs as well.
Japan - Consumer prices show no signs of improvement in deflation
January headline nationwide consumer price inflation dropped to -0.3% yoy from -0.1% yoy in December. Core CPI excluding fresh food remained at -0.2% yoy but core CPI excluding food and energy fell further to -0.7% yoy from -0.6%.
The more current data for Tokyo were even weaker: the headline dropped to -0.9% yoy in February from a revised -0.5% yoy in January (was -0.6%). Compared to January, the index declined by 0.4% mom in seasonally adjusted terms, which was the weakest monthly reading since December 2010. Both core CPI rates slowed as well, by 0.1pp, leaving the ex fresh food measure at -0.6% yoy and the ex food/energy measure at -1.0% yoy.
Looking into the details of both nationwide and Tokyo CPI data, deflation remains broadly based. Compared to a year ago, the main drag in prices was seen for household durable goods such as air conditioners and TVs. On the other hand, energy prices, particularly retail gasoline prices and electricity prices, surged from a year ago. However, changes made in January 2012 to the composition of the index may have influenced the result. In other words, our expectations that the recent yen depreciation would begin to push up import prices has so far not materialized - but it will.
Overall, the CPI data show virtually no progress in exiting from deflation. Consequently, the pressure on the new BoJ governor will remain intense, not least given the new 2% inflation target which is to be achieved “as soon as possible”. Clearly, that target seems very far away.
What to expect today, once again from SocGen:
Dovish statements by the Fed chairman and a pledge by ECB president Draghi no to rush to tighten monetary policy have this week kept alive the rally in risk assets, with the Dow industrials yesterday climbing to within striking distance of all-time highs. The bond market too has rallied with Italy, month-end buying, and perhaps fears over the US sequester, pushing yields lower for a second consecutive week with the front end leading the move and causing curves to bull flatten. In the case of the eurozone, 2y bunds yesterday pierced 0.045% which may hasten a return to negative territory and the lows of last December. EU and ECB officials have been calling the bottom in unison in recent weeks, but this is not being borne out by front end yields. With talk circulating of a Netherlands ratings downgrade and even the ECB being talk into lowering rates by some, it is no wonder that EUR bears will feel emboldened. Failure to close the month of February above 1.3190 may bring out a few more bears targeting a test of 1.30 in the coming days. The manufacturing PMI data today will simply reaffirm the widening gulf in sentiment that exists between Germany and France. Unemployment numbers released earlier this week showed a rise in French jobseekers by 43,900 in January. In contrast, Germany revealed a rise in employed people by more than 20,000 in January for a third month running. The macro disparity is not something fresh ECB stimulus will resolve, but it certainly did not stop the Eonia curve from re-inverting. Keep an eye on LTRO repayment amounts today (12:00CET).
Finally, a comprehensive recap of all events from Deutsche's Jim Reid:
Its a fairly big day today with the PMI/ISM numbers being published (China has kicked things off in a disappointing manner) and the US Sequester having now been activated. We also start a new month that will hopefully usher in warmer (pollen-free hopefully!) weather here in the UK. Maybe then my trees will also finally start to grow making them a more difficult target. At the end of today's EMR we'll review February and 2013 to date from a performance stand point across asset classes. February has been a month of fairly divergent returns across the globe. More on that later but first we wanted to delve deeper into the PMI/ISMs.
Today's numbers will be particularly interesting to see whether last week's disappointing European flash numbers are confirmed, including what may be fairly flat first sighters at the Italy and Spain numbers and also whether the US continues to lead the developed market pack. We still think these numbers over the next few months will dictate markets. On our PMI/ISM vs equity regression model the US market is now broadly fair value given the recent rise in the ISM. Interestingly France is very over-valued on this measure (over 30%) followed closely by Japan. Japan has clearly benefited from the recent change in tact of the Government/BoJ so markets have understandably run way ahead of any potential growth benefits. This may be the correct trade but its built on expectations and hope for now. China has kicked off proceedings overnight with the lowest official PMI print in five months. Following on from the Flash PMI weakness earlier this week the official Chinese reading came in at 50.1 for February. This is down from January’s 50.4 and also short of the consensus of 50.5. The Shanghai Composite is trading -0.9% lower although the data may have been distorted by some Lunar New Year seasonality. Elsewhere in Asia, major bourses are mixed with softer markets seen in the Hang Seng (-0.4%) and ASX 200 (-0.3%) while the Nikkei is +0.5% higher.
Taking stock of yesterday’s session, US equities were poised to finish higher until hopes of a sequester deal reversed on news that a pair of partisan proposal to replace the $85bn automatic spending cuts was rejected by the Senate. The index finished -0.09% lower on the day and 0.7% below its intraday highs. The President has invited congressional leaders for a White House meeting today but the Washington Post overnight said that expectations for the meeting are low. Republican leaders said no new compromise would be tabled in talks at the meeting later today. Indeed the Post said that House Republicans are already turning their attention to the next deadline (27 March), drafting a measure that would avoid a government shutdown while leaving the sequester in place through the end of September. Yesterday the IMF was quick to point out that it will lower its growth forecast for the US this year because of the $85bn spending cuts that starts today.
On the data front yesterday was a mixed day. A stronger Chicago PMI (56.8 v 54.0) and larger decline in initial claims (344k v 360k) met with a lower-than-expected upward revision to US GDP. Q4 GDP was revised up to +0.1% (from -0.1%) versus market consensus of +0.5%. In Europe, Italian bond yields fell 8bps on the day to 4.734% on hopes that a coalition government will be formed. This comes on the back of news that we flagged yesterday, in which the Finance Undersecretary Gianfranco Polillo said that a union between Bersani and Berlusconi was the ‘only possible way’. As we await for further clarity, Berlusconi is under investigation on suspicion of bribing a senator to change sides in parliament although his lawyer has denied the claim (Reuters).
The key focus today will be on the European PMIs and US ISM. Elsewhere we also have Euroland unemployment, German retail sales, US personal income/spending, US auto sales and the UofM consumer sentiment data. We’ll also be following market’s reaction closely given the disappointing developments at Capitol Hill.