Global PMI Readings: Every Economy Grows As Everyone Devalues Equally, Means More Devaluation Ahead

Futures are still on fire, following a much stronger than expected manufacturing reading in China. As Bloomberg reports: "A purchasing managers’ index released by the logistics federation rose to 54.7 from 53.8 in September, with input prices climbing the most in six months. A second PMI, from HSBC Holdings Plc and Markit Economics, jumped to 54.8 from 52.9." What is less known is that European PMIs also jumped across the board. As Erik Nielsen points out below UK, Norway, Turkey and Russia all reported stronger than expected PMI readings. Nielsen tries to make the case that even a 1.40 EURUSD is not sufficient to bring Europe down as somehow this is the new goldilocks. We completely disagree, and so will the ECB once the dollar is pushed strongly beyond the 1.40 barrier on Wednesday. Lastly, all eyes are now on US ISM to be reported later, with a consensus estimate of 54. It will be somewhat confusing if in the race to devalue the fastest, every single economy ended up growing. Not to mention somewhat incredible. But if confirmed, it will only give further impetus to debase currencies, as the last resort of economic growth is validated as "working." Which of course will mean more strength for assets that can not be printed out of thin linen.

From Goldman's Erik Nielsen:

As you hopefully know, our pan-European story has long been one of only gradual decline in the growth rate back to a longer term sustainable level from the strong post-recession rebounds - and not the beginning of a more fundamental decline.  This view – for which we have received a lot of push-back in recent months – has informed our call on central bank policies throughout Europe and contributed to our strategists’ calls as well.  (I attach two relevant paragraphs on this issue from my note yesterday).

For us Europe-bulls, this morning has been pretty exceptional in terms of data releases, specifically the important manufacturing PMIs for October in many countries, suggesting a clear stabilisation, if not even a re-acceleration:

1.  The UK increased to 54.9 from 53.5 – consensus had expected a decline.
2.  Norway increased to 54.2 from 53.0 – a stronger gain than expected.
3.  Turkey increased to 54.3 from 50.3 – much much better than expected and beautifully broad-based, including for new export orders.
4.  Russia increased to 51.8 from 51.2 – a more mixed number, driven by employment.

And the two European countries on steroids, saw only modest declines to levels still consistent with very strong growth:

5.  Sweden declined to 61.8 from 63.3
6.  Switzerland declined to 59.2 from 59.7.


These are the two relevant paragraphs from yesterday’s Sunday email

1. We are through another pretty good week in Europe, although tempered by slight disappointments on the retail side.  Overall, the pan-European growth picture continues to look just fine:  The UK printed GDP growth at an 3.2% annualised rate in Q3 (in line with our expectation but well above consensus) and while Sweden’s September KI/NIER Economic Tendency Survey fell more than expected, it remains more than one standard error above its mean and hence in line with above-trend growth.  Not surprisingly, the Riksbank hiked rates by 25bp as the latest sign of the ongoing gradual European exit.  In the Euro-zone, where the market has provided most of the exit so far for the ECB, banks provided further evidence that life is indeed returning towards normal: On Wednesday, they reported a €15.3bn increase in their lending to non-financial corporate for September; making it the first two-months consecutive increase since late 2008 (lending to households has been increasing for a good long while already.)  And they reported a considerably smaller tightening in their lending standards for Q3 than in Q2 and said – in the ECB survey – that they expect Q3 to be the last quarter of net tightening.  Not surprisingly, therefore, the usually pretty reliable Eurocoin indicator increased in October to a level consistent with 1.6% annualised GDP growth, the first pick-up since March.  To me, this pick-up is particularly important because our “big story” ever since spring has been precisely that (1) the slowdown in growth was normal and indeed desirable since the post-recession rebound was unsustainably strong, and (2) there would be no reason to think the slowdown would take us below the 1.5%-2.0% range before stabilisation sets in.  So far so good.  The slight disappointments this past week was German (and Spanish) retail sales for September.  German sales dropped 2.3% mom, but remember that these numbers are very volatile, and in spite of the September drop, Q3 was still up 0.2% qoq.  But given our expectation of continued better domestic demand in core Europe, this is worthwhile watching.  Spanish retail sales – also volatile - declined 2.9% mom in September; more than expected, but I think this is less of an issue for our basic European view.

2. The continuously better – broad-based – macro numbers throughout Europe are reflected in European companies’ earnings reports for Q3.  My colleague, Matthieu Walterspiler, reports that of the 107 companies (with at least two estimates) which have reported their results so far, a pretty impressive 55% have beaten their estimates by more than 5%, while 21% missed by more than 5%.  And on Friday, the FT reported that the first two of “an expected string of large German industrial groups” promised to raise their dividend payments.  I hear it again and again: With the US stumbling (well, 2% growth), Europe cannot recover – but as we have argued ad nausea, the historical correlation (with two quarters’ lag) between US and European growth is a modest 0.3.  To me, the risk of a serious drag from the US all lies in the FX.  EUR/USD at around 1.40 is not great for the Euro-zone, but it’s not a disastrous either.  The overall picture of a broad-based (and increasingly domestic demand driven) recovery remains intact – and it includes virtually every European country part from four peripheral Euro-zone countries, and it is transmitting beautifully to both households and corporate behaviour (savings are now declining again, and corporates are investing).


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