Latest Global Economic Slowdown Confirmed After Disappointing Chinese, German PMI Data

If there was any debate about the global economic contraction, driven largely due to pundits confusing manipulated stock market levitation with this anachronistic thing called the "economy" and fundamentals for the fourth year in a row, all doubts were removed after this morning's manufacturing PMI data out of China, which as reported previously was a big disappointment (sending the Composite firmly into the red for the year down 2.57% to 2184.5) only to be followed by just as disappointing manufacturing and services PMI data out of Germany, which tumbled from 49 and 50.9 to 47.9 and 49.2, respectively, missing estimates of 49.and 51. This was the first decline in the German private sector since November 2012 and thus, for Europe's growth core.

The composite German PMI tumbled to a 6-month low of 48.8 as a result, dropping at its fastest pace since October 2012, meaning the European economic deterioration is just getting started, and at the worst possible time for Merkel several months ahead of her reelection campaign. The end result was a miss in the blended Eurozone Mfg PMI, which dropped from 46.8 to 46.5, even as the less relevant Services component eaked out a small gain from 46.4 to 46.6, on the back of a dead cat bounce in French economic indicators. Bottom line: a contraction in both European manufacturing and services for the 15th consecutive month. Some "recovery."

Commenting on the flash European PMI data, Chris Williamson, Chief Economist at Markit said:

“Although the PMI was unchanged in April, the survey is signalling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify further in coming months rather than ease.


“Thanks to an upturn in the survey at the start of the year, the PMI suggests that euro area GDP fell by around 0.2-0.3% in the first quarter after a 0.6% drop at the end of last year. However, the April reading points to a 0.4% rate of decline, with downside risks. Worryingly, the rate of loss of new business gathered further momentum, suggesting that activity and employment could fall at steeper rates in May.


“The renewed decline in Germany will also raise fears that the region’s largest growth engine has moved into reverse, thereby acting as a drag on the region at the same time as particularly steep downturns persist in France, Italy and Spain.


“Policymakers will at least be relieved to see inflationary pressures cooling, which could further open the door to renewed policy stimulus.”

Needless to say, this is bad news for EUR bulls (such as all sellside banks who have been furiously selling their EUR exposure to clients on their long EUR calls for the past 3 months, and all GETCO ES-linked correlation signals) as the ECB was just waiting for an indicator that the European economy was slowing down even more before it cut rates. It just got this indicator today.

Confirming that the market is no longer driven by anything remotely related to underlying economics, stock futures have barely moved and in fact are green for the S&P and Dow, reflecting hopes of even more easing out of Europe this time, while Italian 10 Year bonds have dropped below 4% for the first time since November 2010 on hopes of who knows what: that Italy will have a functioning government perhaps? Yes, funnier things have been said. But if this lunacy explains the Italian bond rip, nobody knows why Spanish bond yields are tumbling. Oh wait, the Japanese liquidity tsunami. All is clear now. As for French 10 year bond yields dropping to a record low yield of 1.708%? Ah, forget it.

Some other highlights out of doomed Europe, only kept afloat courtesy of the Japanese wall of money:

  • EC May Allow Spain 2013 Budget Deficit at 6.5%: El Pais
  • Bank of Spain Considers New Rules on Risky Loans: Pais
  • Spanish 10-Year Bonds Advance for Fifth Day; Bunds Gain
  • Italy’s Grillo Says State to Run Out of Funds in Fall: Bild
  • Goodbody: Irish Precautionary Program Would Aid Bailout Exit

European markets recap:

  • Spanish 10Y yield down 14bps to 4.35%, lowest since Nov. 2010
  • Italian 10Y yield down 7bps to 3.99%, lowest since Nov. 2010
  • Portuguese 10Y yield down 10bps at 5.779%, lowest since Oct., 2010
  • Irish 10Y yields down 17bps at 3.493%, earlier hit lowest since 2006 at 3.479%
  • U.K. 10Y yield down 2bps to 1.63%
  • German 10Y yield down 2bps to 1.21%, earlier hit lowest since July 2012 at 1.193%
  • Bund future up 0.16% to 146.59, earlier hit YTD peak of 146.77
  • BTP future up 0.71% to 114.95, earlier hit YTD peak of 115.04
  • EUR/USD down 0.64% to $1.2983
  • Dollar Index up 0.36% to 82.97
  • Sterling spot down 0.44% to $1.5223
  • 1Y euro cross currency basis swap down 1bp to -23bps
  • Stoxx 600 up 0.93% to 288.34

Finally, the full overnight summary as usual from DB's Jim Reid

European policymakers will be watching today’s April flash PMIs in earnest as the market continues to grapple with whether we’re in the midst of a Q2 slowdown or not. After the disappointment of last month where the euroarea flash composite PMI fell 1.3 points to 46.5, the forecast is for the composite reading to stabilise at the same level for April. The market is expecting a 0.1pt improvement in the euroarea services PMI to 46.5 to be offset by a 0.1pt downtick in the euroarea manufacturing PMI to 46.7. For France in particular, consensus is for a small improvement in both the manufacturing (44.1 vs 44.0 previous) and the services PMI (42.0 vs 41.3). In Germany, the manufacturing PMI is expected to remain unchanged at 49.0, with a small uptick in the services PMI to 51.0 (vs 50.9).

Overnight, China has kicked off this month’s PMIs on a downbeat note with the HSBC flash manufacturing PMI coming in at 50.5, which is down from estimates of 51.5 and lower than last month’s reading of 51.6. The 3-month average dropped to 50.8, the lowest level since December 2012 when China was in the middle of a 2H growth slowdown. There was broad-based weakness in the details of the report. New export orders fell to 48.6 from 50.5 in the previous month suggesting softness in external demand. The employment subindex as well as input/output indices fell month-on-month in April.

Asian markets have sold off in reaction to the Chinese data with the Shanghai Composite (-2.1%) and Hang Seng (-1.2%) indices firmly in negative territory. Chinese construction, commodities and oil & gas stocks are bearing the brunt  of the selloff. Other sectors which are underperforming are Chinese real estate and banking stocks. Other Asian bourses have pared earlier gains, while the S&P500 futures is trading down 4.5pts as we type. The Australian dollar is 0.4% weaker against the USD, and commodities such as copper (-0.9%) and crude (-0.6%) are weaker.

Away from PMIs, the other major event for macro watchers today is the March quarter results for Apple. As we mentioned yesterday, tech earnings have disappointed so far this reporting season particularly on the revenue side. Add to this the fact that Apple’s share price has shed 25% in the year-to-date, and it’s fair to say that markets are bracing for a reasonably poor quarter from the S&P500 heavyweight. Indeed, Street EPS estimates for the March quarter have declined about 20% in recent months according to Bloomberg data. As it currently stands, the Street’s is anticipating Apple to report EPS and sales of $9.97 of $42.3bn respectively for the March quarter. Aside from Apple we have around 36 other S&P500 companies reporting as we approach the peak days for earnings season later this week.

It was a quieter day on the earnings calendar yesterday but macro bellwether, Caterpillar, recorded a notable miss on both the earnings and revenue lines. Despite the earnings miss and 2013 profit downgrade, the stock closed 2.8% higher after management made some upbeat comments about global mining demand and announced a resumption of its stock buyback.

Elsewhere in the markets yesterday, risk assets continued to trade well despite weaker than expected US existing home sales data. Existing home sales dropped 0.6% in March to an annual rate of 4.92m, against consensus estimates of 5.03m. However there was evidence that the home sales slowdown was being caused by supply constraints. The listings of existing homes hovered around 4.7 months (down 17% yoy). Meanwhile, the share of distressed sales dropped to 21% last month which is a new cyclical low. The S&P500 closed near the day's highs of +0.47% with 9 out of 10 sectors trading up. Gold and crude continued to firm yesterday, closing 2% and 0.9% better, leading a rally in commodity stocks on the S&P500, but much of that looks set to reverse today.

In Europe, comments from re-elected president Napolitano pledging to end the country's political stalemate helped periphery bond markets rally. Italian two year yields dropped to a record low of 1.2% and 10yr Italian bond yields reached a two-and-a-half year low of 4.05%. The strong performance in bond markets helped the European iTraxx (-2.5bp) and Crossover (-8.5bp) credit indices outperform equities on the day.

Turning to the day ahead, the French kickoff today’s European flash PMI data at 8am London time, followed by the German reading half an hour later and the Euroarea composite number at 9am. In Italy, President Napolitano is expected to commence meeting with political leaders in an effort to forge a workable government. In the US, the flash Markit PMIs are due, together with
data on new home sales. In addition to Apple’s earnings, Lockheed Martin, Yum! Brands and AT&T may also be of interest for macro watchers.


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