News That Matters
Markit's US Services PMI printed a healthy 56.1 for August, rising for the 2nd consecutive month, comfortably beating expectations and giving The Fed more ammo for a September hike. This rise was achieved despite the weakest rise in new work in 3 months. While Markit notes that this headline print suggest 'everything is awesome' it suggests the need for more stimulus just in case, as prices are falling. Following the dramatic spike in the July ISM Services to 10 year highs, it dropped back modestly, thanks to slide in New Orders, with an August print of 59.0 - still the highest since Nov 2005, again offering no excuse for The Fed to stay on hold.
With China closed today, the usual overnight market manipulation fireworks out of Beijing were absent but that does not meant asset levitation could not take place, and instead of the daily kick start out of China today it has been all about the ECB which as we previewed two days ago, is expected - at least by some such as ABN Amro - to outright boost its QE, while virtually everyone else expects Draghi to not only cut the ECB's inflation forecast, which reminds us of the chart which in March we dubbed the biggest hockeystick ever (we knew it wouldn't last) but to verbally jawbone the Euro as low as possible (i.e., the Dax as high as it will get) even if the former Goldmanite does not explicitly commit to more QE.
Given “highly accommodative” policy almost everywhere, and so little gained; it isn’t a good sign particularly after eight incessant years of it and the lagged effects from the renewed “dollar” wave still to be withstood. Every year was supposed to be “the year”, but 2015 was a surefire lock according to orthodox versions. The real difference, unlike past years, is that everything is going wrong so far just as predicted by the “strong dollar.”
Following disappoint PMIs from around the world, the US decoupling meme took another knock today as Markit PMI printed 53.0 (from 53.8) - its lowest in almost 2 years, led by a plunge in the employment subindex. Weakness was also evident in new factory orders. As Markit notes, "U.S. manufacturing sector continues to struggle under the weight of the strong dollar and heightened global economic uncertainty." On the heels of Milwaukee and Dallas Fed weakness, ISM Manufacturing printed a disastrous 51.1 (vs 52.5 expectations) - the lowest since May 2013. Employment tumbled, as did New Export ordedrs, but unadjusted New Orders plunged to its lowest since 2013, which is a problem given the massive inventory builds that have saved the world in the last few months.
First the good news: of the 28 global regions that have reported PMIs so far (the US Markit PMI is due later today), 18 posted a print of over 50, or indicating manufacturing expansion.
Now the bad news: more than two-thirds of PMIs in August deteriorated compared to July suggesting that while the global economy is not in a recession yet, absent some dramatic improvement, a global economic contraction is just around the corner.
Just like the last time when Chinese flash PMI data came out at the lowest level since the financial crisis, so overnight when both the official Chinese manufacturing and service PMI data, as well as the Caixin final PMI,s confirmed China's economy has not only ground to a halt but is now contracting with the official manufacturing data the lowest in 3 years and the first contraction in 6 months, stocks around the globe tumbled on concerns another major devaluation round by the PBOC is just around the corner with the drop led by the Shanghai Composite which plunged as much as 4% before, the cavalry arrived and bought every piece of SSE 50 index of China's biggest companies it could find, and in a rerun of yestterday sent it to a green close, with the SHCOMP closing just -1.23% in the red. So much for the "no interventions" myth. We wonder which journalist will take the blame for today's rout.
Hot on the heels of a 22-month low recorded by the latest flash Manufacturing PMI survey, August's preliminary Services PMI was slighlty better than expected but dipped from 55.7 to 55.2 - back towards the lowest levels of 2015. Under the surface things do not look great with New Business Volumes at their weakest since January amd Prices Charged tumbling to the lowest level since June 2013. As Markit notes, "underlying momentum within the U.S. economy had shifted down a gear even before the recent global market turmoil and escalating worries about China’s growth outlook gathered on the horizon."
The PBOC cut itself was not surprising, considering the PBOC now has to juggle and micromanage every aspect of the economy, from its sliding currency, to the bursting stock bubble, to record capital outflow, to soaring real interest rates, to the slowing economy. In fact, bulls around the globe will welcome the latest central bank bailout. Which also happens to be the worst aspect of today's intervention, because one can once again toss all the talk that China would finally stop intervening in asset pricing, with today's decision merely perpetuating the market's reliance on central banks. As a reference, this was the second time China cut both RRR and interest rates in 2 months: the last time it did so was during the depths of the financial crisis.
News That Matters
“August’s survey highlights a lack of growth momentum and continued weak price pressures across the U.S. manufacturing sector, which adds some fuel to the dovish argument as policymakers weigh up tightening policy in September. With the headline PMI swiftly losing ground after a modest rebound during July, the latest figure now points to the weakest overall pace of manufacturing growth for almost two years."
Perhaps the biggest surprise about the overnight Chinese stock rout is which followed the lowest manufacturing PMI since March 2009, is that it happened despite repeat sellside pleas for a PBOC RRR cut as soon as this weekend: usually that alone would have been sufficient to push the market back into the green, and it almost worked when in the afternoon session stocks rebounded after dropping as much as 4.7% below the "hard" floor of 3500, but then a second bout of selling just before the close took Chinese stocks right back to the lows with the Shanghai Composite closing at 3,507, down 4.3% on the day, having wiped out the entire 18% rebound from July 8 when the PBOC first threatened both sellers and shorters with arrest.
It appears bad news in China is "bad news" for everyone. With Chinese authorities already in full liquidity spigot-mode, the fact that China PMI for August collapsed to its lowest since March 2009 strongly suggests that - unlike every talking-head's proclamation - a crashing stock market does (whether reflexively or not) impact the real economy. US equity futures legged significantly lower on the news - S&P 500 to 7-month lows, eyeing the stunning 2,000 level; and Japanese stocks also legged lower.
Goldman Sachs, Morgan Stanley, and JP Morgan aren't satisfied with disparate, disorganized "reference data" which is why they're teaming up on an initiative called "SPReD". As WSJ reports, "using consistent data allows the banks to form accurate pricing for trades," and we all know what can happen when Wall Street gets together to "standardize" a reference point on which trades are based.
While many labor market indicators were softer in July, some important service sector indicators, such as ISM nonmanufacturing employment, were significantly stronger; and on balance, they expect job growth roughly consistent with the 223k increase in June. The participation rate showed a surprising drop of 0.3pp in June to 62.6% - due in large part from a calendar effect caused by the timing of the reference week relative to the end of the school year - they therefore expect an at least partial rebound in July.