SCOREBOARD: Manufacturing blues

Weak manufacturing data in the US and Europe took the daring out of markets.

A run of weaker global manufacturing data has hit risk appetite and we saw that yesterday in the Australian market. After a weaker Chinese PMI, the Australian dollar fell almost a big figure while Aussie 3-year futures spiked 7 ticks and the 10s 5 ticks. It was a bit of a knee-jerk reaction for mine but this sentiment carried through after the European PMIs also disappointed – not helped by comments from FedEX Corp suggesting growth would be sub-trend over coming quarters.

So the European manufacturing PMI fell to 47.7 in March, which was weaker than February’s 49 and the expectation for a modest lift to 49.5. This is the eighth consecutive month that this index has been below 50. Weak, sure, but by most reports the European downturn is more modest than many had expected and the general expectation is that the European economy will pick up over the coming quarters – if just modestly.

The real focus is on China and the US and here, I think the Reserve Bank governor hit the nail on head when he suggested concerns over a Chinese slowdown are overdone. The market has been worrying about a hard landing for four years; as yet there hasn’t been one and the current data flow doesn’t point to one. The Chinese government wants a slower growth profile, sure, but they stated that this was to ensure the gradual easing of price controls they were undertaking, didn’t lead to inflation. So far so good – a modest slowdown and easing inflation.

The US we know is accelerating, even if, as Bernanke suggested overnight, consumer spending was too weak to ensure a healthy pace of growth. Point blank, I disagree with this statement and don’t think it has any empirical support. Time and again, pessimism over the US recovery has proved excessive and this time is no different. We’ll see. Jobless claims continue to suggest the labour market will continue to post a decent recovery at any rate – for me, this is the key to ongoing consumption growth. At the very least concerns over job loss for your average American have lessened considerably, with all the confidence and spending support that provides. According to data out last night, claims fell modestly in the week to March 17 – 348,000 from 353,000 – but the fact they’ve been around the 350,000 mark for a month and a half now is pretty good. The average in 2011 was 410,000.

As mentioned though, the market’s focus was on those much lower tier PMIs. The Australian dollar weakened further, but not much – only about 35 pips or so from 1630 AEDT – to 1.0379 (two month low). Our debt futures continued to push higher as well, the 3s and the 10s rose another 5 ticks (from 1630) to 96.35 and 95.775 respectively. In contrast moves on the treasury curve were comparatively muted, yields pushing a little higher on the jobless claims figures, but easing off in subsequent trading. The yield on the 10-year for instance is off less than a basis points (from 1630) at 2.278 per cent, the 5-year yield is down 2 basis points to 1.11 per cent, while the 2-year yield is little changed at 0.363 per cent.

Equities had a worse session of it, down 1.3 per cent on the Dax, 1.6 per cent on the CaC and 0.8 per cent on the FTSE. Wall Street didn’t do as badly but the direction was the same. The S&P for instance closed 0.7 per cent weaker (1392) with all sectors down, energy, basic materials and financials leading the charge. That’s probably the China effect just there – crude fell 1.7 per cent on WTI to $105.5, Brent fell 0.9 per cent to $123 and commodities elsewhere were generally weaker (gold down $8 to 1643, silver off 2.7 per cent and copper fell 1.1 per cent in New York). No real comfort was taken from those claims at all, the S&P dropping at the open and hitting the low (minus 1 per cent) a couple of hours after the data was released. Elsewhere the Dow finished 78 points lower (13055), the Nasdaq fell 0.4 per cent (3063) and the SPI was 1.1 per cent lower.

That’s most of it, while forex moves elsewhere saw the euro drop a big figure from 1630 AEDT at the low. It’s bounced back a bit but, at the time of writing, is still 57 ticks lower at 1.3188. Sterling followed a similar path and is at 1.5817 or 60 pips lower form 1630, while the yen is at 82.51 from 83.38.

Otherwise we saw US home prices unchanged in January according to the FHFA, while the US leading index rose 0.7 per cent in February after a 0.2 per cent gain the month prior. Note also that China and Australia signed a $31 billion currency swap agreement (the largest of 21 such agreements that China has) which the RBA said was to "support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial cooperation. The agreement reflects the increasing opportunities available to settle trade between the two countries in Chinese renminbi and to make RMB-denominated investments. It follows the decision by the Chinese authorities last November to allow convertibility between Australian dollars and Chinese yuan in the interbank market in China.

Looking at the day ahead, there is nothing for Australia or New Zealand and tonight is pretty quiet as well. We see new US home sales, Canadian CPI and the Federal Reserve’s Central Banking Conference kicks off where the topic is "Before, During, and After the Crisis”.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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