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Global Slowdown Confirmed By PMIs Missing From Japan To China To Europe; USDJPY Nears 119 Then Slides

The continuation of the two major themes witnessed over the past month continued overnight: i) the USDJPY rout accelerated, with the Yen running to within 2 pips of 119 against the dollar as Albert Edwards' revised USDJPY target of 145 now appears just a matter of weeks not months (even though subsequent newsflow halted today's currency decimation and the Yen has since risen 100 pips , and ii) the global economic slowdown was once again validated by global PMIs missing expectations from Japan to China (as noted earlier) and as of this morning, to Europe, where the Manufacturing, Services and Composite PMI all missed across the board, driven by a particular weakness in France (Mfg PMI down from 48.5 to 47.6, below the 48.8 expected), but mostly Germany, after Europe's growth dynamo, which disappointed everyone after yesterday's rebound in the Zew sentiment print, printed a PMI of only 50.0, down from 51.4 a month ago, down from 52.7 a year ago, and below the 51.5 expected.

This was driven by a tumble in New Orders from 49.8 to 47.8, which is the lowest reading since December 2012 and is the 3rd consecutive month of contraction. In other words, that Chinese import demand is just not coming back, and once again Draghi's attempts to restart Europe's economy by doing more of what has already failed, have failed.

This is how Goldman spun the data:

The Euro area composite PMI fell from 52.1 to 51.4 in November, against consensus expectations of a 0.3pt increase and our forecast of a flat reading (Cons: 52.3, GS: 52.1). The decline in the composite PMI was driven by a 1.0pt fall in the services component to 51.3, while the manufacturing PMI edged down 0.2pt to 50.4. The German composite PMI showed a notable large decline. The level of PMIs continues to point to small positive growth rates in Q4.

  • The manufacturing PMI fell marginally from 50.6 to 50.4 in November, offsetting most of the small gain observed in October. The manufacturing PMI is down 3.6pt relative to its recent peak in January 2014. The services PMI recorded a sharper decline, falling from 52.3 to 51.3, extending its downward move to a fourth consecutive month (Exhibit 1). The consensus expectation was for small increase in both the manufacturing and services PMI.
  • The breakdown showed a mixed picture. New orders fell 0.4pt but the forward-looking orders-to-stock difference rose by 0.8pt on the back of lower stocks (Exhibit 2). Other subcomponents of the manufacturing PMI sent mixed signals, with output rising 0.2pt, but employment falling 0.3pt. For services, the forward-looking subcomponents (which are not part of the headline services PMI figure) were mixed: 'incoming new business' fell 1.0pt, while 'business expectations' ticked up by 0.6pt.
  • In addition to the Euro area aggregate, Flash PMIs were released for Germany and France. The German composite PMI contracted by 1.8pt to 52.1, against consensus expectations of a small increase (Cons: 54.0). This was driven by a sharp decline in both the manufacturing PMI (-1.4pt to 50.0) and services PMI (-2.4pt to 52.1). The German composite PMI has been volatile since the start of the year, but today's weak reading drives the index back to its May 2013's level. In contrast, the French composite PMI printed at 48.4 in November, 0.2pt above its October level. The decline in the manufacturing component (-0.9pt to 47.6) was more than offset by a 0.5pt increase in the service component (to 48.8) (Exhibit 3).
  • Based on historical correlations, a reading of 51.4 is associated with +0.1%qoq GDP growth. In the same vein, our CAI points to similar growth in November (+0.2%), in line with the October reading (Exhibit 4).

As a result European equities initially opened in relatively unchanged territory following on from the neutral FOMC minutes release which failed to see participants adjust their expectations for a Fed rate hike. Thereafter, attention turned towards the slew of Eurozone PMI releases, which confirmed the global weakness previously revealed in Japan anad China. The main market-mover this morning was from Germany which saw an across the board miss for the Eurozone-heavyweight with manufacturing slipping to 50.0 and thus only narrowingly missing a contractionary reading. This subsequently saw European equities firmly slip into the red with participants beginning to question the efficacy of the ECB’s stimulus package, while fixed income products firmed alongside the softness seen in stocks. On an index specific basis for Europe, the IBEX is the notable underperformer after being weighed on by BBVA following the completion of their stock offering.


Bulletin Headline Summary from RanSquawk and Bloomberg

  • Eurozone PMI figures send European equities lower after painting a particularly dreary picture of the area’s manufacturing and service sector.
  • USD/JPY continued its move higher overnight as JPY remains out of favour, although failed to make a break above 119.00, while GBP found reprieve following a strong retail sales release.
  • Looking ahead, attention turns towards US CPI, weekly jobs figures, manufacturing PMI, Philadelphia Fed outlook, existing home sales and any comments from Fed’s Tarullo, ECB’s Mersch and Lautenschlaeger.
  • Treasuries gain as PMI reports show risk of renewed slowdown in euro area and a decline in Chinese manufacturing; U.S. CPI due today before auction of 10Y TIPS.
  • HSBC/Markit’s China PMI fell to 50.0 in November, a six-month low, below the 50.2 median in a Bloomberg survey and lower than last month’s 50.4
  • PBOC is considering changing the way it calculates banks’ loan-to-deposit ratios, a government official briefed on the matter said, signaling efforts to boost credit as the economy falters
  • Euro-area PMI for factories and services fell to 51.4 in November, lowest in 16 months; a composite measure for Germany also declined
  • U.K. retail sales rose at the fastest pace in six months in October, as prices fell 1.5% last month from a year earlier, their biggest decline since 2002
  • German Foreign Minister Frank-Walter Steinmeier said mounting tensions in eastern Ukraine raised the risk of a “major military confrontation”
  • Obama’s deputy national security adviser said the administration would welcome congressional authorization for U.S. military action against Islamic State with limits on duration and ground combat
  • Obama will use a prime-time television speech tonight to present the biggest reprieve for undocumented immigrants in a generation, even as his order falls short of goals embraced by legislation the U.S. Senate passed last year
  • If the U.K. Independence Party wins a second elected seat in Parliament today, it will be a rebuke to Conservatives and Labour, suggesting that Cameron’s promises of a referendum on EU membership and tighter rules on immigration have done nothing to win voters and that Labour isn’t the beneficiary
  • Sovereign yields mostly lower. Asian stocks flat to lower. European stocks slide, U.S. equity-index futures lower. Brent crude falls, gold and copper gain

US Economic Calendar

  • 8:30am: Initial Jobless Claims, Nov. 15, est. 284k (prior 290k); Continuing Claims, Nov. 8, est. 2.370m (prior 2.392m)
  • 8:30am: CPI m/m, Oct., est. -0.1% (prior 0.1%);
    • CPI Ex-Food and Energy m/m, Oct., est. 0.1% (prior 0.1%)
    • CPI y/y, Oct., est. 1.6% (prior 1.7%); CPI Ex-Food and Energy y/y, Oct., est. 1.7% (prior 1.7%)
  • 9:45am: Markit U.S. Manufacturing PMI, Nov. preliminary 56.3 (prior 55.9)
  • 9:45am: Bloomberg Consumer Comfort, Nov. 16 (prior 38.2); Bloomberg Economic Expectations, Nov. (prior 51)
  • 10:00am: Philadelphia Fed Business Outlook, Nov., est. 18.5 (prior 20.7)
  • 10:00am: Existing Home Sales, Oct., est. 5.15m (prior 5.17m)
  • Existing Home Sales m/m, Oct. -0.4% (prior 2.4%)
  • 10:00am: Leading Index, Oct., est. 0.6% (prior 0.8%)

Central Banks

  • 7:45am: Fed’s Tarullo speaks in New York
  • 1:30pm: Fed’s Mester speaks in London
  • 8:30pm: Fed’s Williams speaks in Seoul


In FX markets, EUR/USD was initially provided a bid following a bout of USD weakness after USD/JPY failed to break above 119.00 which also then provided some reprieve for antipodean currencies, with AUD and NZD weighed on by declining iron ore prices and weak PPI data respectively. However, this upside for EUR was short-lived following the Eurozone PMI report which subsequently saw the USD-index pare earlier losses. Another key mover in FX markets has been GBP following the UK’s across the board stronger than expected retail sales report which saw GBP extend on yesterday’s BoE inspired gains.


Elsewhere, energy markets trade in modest negative territory while largely tracking movements in the USD-index. However, overnight saw some interesting rhetoric from the Venezuelan President Maduro, who said Venezuela is defending the oil price and fair price for oil is USD 100/bbl while the Iranian Oil Minister said ‘under no circumstance, will we reduce our global market share, even by one barrel’. In terms of price action in metals markets precious metals declined overnight as Chinese factory output appeared to stall in November, while sentiment for gold was further weakened following a poll that showed a drop in support for the Swiss referendum, nonetheless the yellow metal has seen somewhat of a rebound heading into the North American open.

* * *

DB's Jim Reid concludes the overnight event summary in a way only he can

Before we get to the FOMC minutes and the first slightly weaker (Japan and China) PMI releases of the day there are a few interesting and potentially head scratching themes bubbling under the surface at the moment. One such theme is the continued slow but meaningful divergence in the direction of IG credit spreads in Europe and the US. US cash IG is at YTD spread wides whereas Euro cash IG at close to YTD tights. As an example European non-financial Single-As and BBBs are both about 15bps tighter in 2014 to Govt bonds. On the other hand the equivalent two US indices are 15-20bp wider with BBBs actually being about 40bps wider than the tights for the year back around the end of June (Single-As 20bp wider). We've put these charts in the pdf today alongside the sterling equivalent which are closer to the US in performance than the European market. So what's going on?

Well as we've highlighted over the last couple of weeks the lower Oil price is seriously depressing the Energy credit sentiment in the US in both HY and IG. However Energy makes up 'only' 10.6% of the US IG credit index and although its the second largest sector, nearly 90% clearly isn't in that sector. We'd also say that after discussions with our US credit strategist Oleg Melentyev, the fall in oil for now is more of a profitability issue than a credit quality issue for IG. At the moment he doesn't even expect much in the way of IG rating actions as a result of the oil move assuming we don't fall much further. Clearly there are risks though and the market is pricing these.

So oil is an issue in the US but it can't explain the whole story. So is it the fear of an increasingly hawkish Fed in 2015? Well perhaps so but since the spread tights in June, 10 year USTs are around 25-30bps lower in yield and equity markets close to their all-time high so these markets aren't that fearful. In fact after the wobble in September/October markets largely priced out a Fed hike in 2015 even if the Fed certainly haven't (see the FOMC minutes below).

Added to this, supply has been picking up but not to unusual levels for the time of year and increasing leverage is still not a big feature of the US IG credit market. So it is likely a combination of the factors above and a perhaps simple reaction to the end of QE which may be slowly reducing liquidity and confidence from the system. However this argument would be more compelling if US equities weren't around their all time highs. Looking at it from the opposite side of the divergence, European IG credit is close to YTD tights because of low yields, fixed income inflows, and expectations that the ECB might buy corporate and government bonds soon thus helping demand for credit and ensuring the yield environment remains lows. So perhaps QE trends are having a bigger impact on the divergence even if the conundrum continues given that European equities are little better than flat for the year. So an interesting theme and one to carry on watching. It seems unlikely that US credit can sustain itself at YTD wides while US equities are around time highs. Something will likely give.

Coming back to the FOMC yesterday, the details did little to get the market excited with the minutes indicating that most committee members support keeping rates low even after the Fed has reached its goal. Interestingly they also highlighted that the members considered removing the ‘considerable time’ language from the statement, possibly highlighting a generally more hawkish consensus stance here. However they also debated inflation and there doesn't seem to be much certainty for the outlook here with the risks on the downside so we'll likely to continue to be data dependant. DB's Alan Ruskin made an interesting point yesterday. He suggested that if Oil stays where it is and other components remain in-line, the CPI could be zero in a year at the same time as the unemployment rate falls to 5%. Even if this is part right it throws up some fascinating dilemmas for policy makers.

As we mentioned, market reaction was fairly muted on the whole yesterday. The S&P 500 closed -0.15% as the small post FOMC rally was quickly repelled into the close. Treasuries were notably weaker across the curve, the 10y +3.7bps higher to 2.36% whilst the Dollar traded modestly firmer.

Looking at the day ahead, we’ve got a host of flash PMIs to look forward to. Before we preview these, we’ve already had the November manufacturing and HSBC flash prints for Japan and China respectively. The readings are fairly subdued, both China (50.0 vs. 50.2 expected) and Japan (52.1 vs. 52.7) coming in under consensus. The former has now fallen to a six month low after hitting 50.4 in October whilst on the production side the output print hit a seven month low at 49.5. However there was some positive news out of Japan, the trade data print this morning shows that exports have risen by the most in eight months in October, although no doubt helped by a weaker JPY. Just on this, as we type the Dollar has extended a seven year highs versus the JPY, trading now at 118.16 (+0.2%). In terms of market reaction in Asia, the Nikkei (+0.11%) and CSI 300 (+0.19%) are trading relatively unchanged following the PMI’s and elsewhere bourses are mostly mixed with the Hang Seng and Kospi +0.26% and -0.45% respectively.

Following this up today we’ve got the preliminary November services and manufacturing readings for the eurozone as well as regional flash prints for Germany and France. With regards to the eurozone, the market is expecting a 52.3 reading, a touch up on October’s 51.2. Meanwhile in Germany the market will likely be disappointed with anything less than 54 for the composite. It’ll be interesting to see if the numbers back up the slightly better sentiment in the market following Draghi’s comments the other day and the modestly better-than-expected Q3 GDP.

Later in the day, we will be focusing our attention back on the US with the much anticipated CPI reading. Our US colleagues are expecting a fall in the headline to -0.1% given declining energy prices which should offset further gains to food prices. They do however expect the core to round up to +0.2% on the back of rising pressure on rental costs due to a shortage of housing supply. Interestingly on this, our colleagues note that the nationwide rental vacancy rate fell to 7.4% from last quarter (from 7.5%), marking the lowest reading since Q1 1995. As a result they expect that the rising rents should keep service inflation above 2% and offset some of the weakness elsewhere in the sector – we note the importance of this factor given that shelter costs account for around 41% of overall core CPI inflation.

Just before we look at the rest of the day ahead, the FT has reported that recent polls in Switzerland show the Swiss National Bank succeeding in beating back the initiative that would force the central bank to hold at least 20% of its assets in gold ahead of the vote at the end of the month. The latest figure from Gfs Bern agency found that support for the initiative had dropped to 38% from 44% last month, with the opposition figure rising to 47%. Gold declined 1.2% yesterday following the news and is 0.3% lower this morning.

In terms of the rest of the day ahead, we’ve got a busy calendar to get through. As well as the anticipated CPI reading this afternoon in the US, we’ve also got initial claims, the Philadelphia Fed index as well October readings for existing home sales and the leading indicator in the region. Just on the latter, we’re not expecting much in the way of a market-moving event given that nearly all of subcomponents are already known. Our US colleagues point out that the current year-to-date annualized gain in the index is 6.6%, marking the fastest rate since 2004 (if we exclude the 2009 print which came off a record low base).

Before all this in Europe, away from the PMI prints we also have industrial sales and orders in Italy as well as the eurozone consumer confidence survey. In terms of data here in the UK, we’ve got the October retail sales reading and CBI trends orders. Not wanting to leave out the usual central bank speak, the ECB’s Mersch will be worth listening out for whilst Fed speakers include Tarullo and Mester speaking on liquidity and forward guidance respectively.