With new monthly purchasing managers’ index (PMI) data released in several countries today comes a new round of macro temperature taking. The diagnosis: while China is going through controlled cooling and the U.S. is posting slow but study gains, Europe’s growth is sputtering and may prompt action on the part of the European Central Bank. In China, preliminary September HSBC data registered a stronger-than-consensus forecast of 50.5, moving further into positive territory on better than expected orders. The subindex for employment declined to 46.9 however, the lowest reading since 2009 and a signal for concern among economists tracking the ongoing transformation of the Chinese economy to a greater focus on internal demand. But there were no silver linings for Europe as industrial managers surveyed indicated a slowdown in September for the euro zone that at 52.3 was lower than forecasts driven by cooling factory activity in primary states including France and Germany. U.S. PMI for the industrial sector, due out this morning, is anticipated to improve marginally.
Draghi delivers sobering speech. In his presentation before the European Parliament’s Committee on Economic and Monetary Affairs yesterday, ECB president Mario Draghi stated that the European recovery is clearly losing momentum. The central bank head said, “ We stand ready to use additional unconventional instruments within our mandate” in the event that activity and inflation remain moribund, leaving the door open for further easing.
U.S. Treasury Department cracks down on inversions. Yesterday the U.S. Treasury Department announced newly tightened regulation on tax inversions. These White House-initiate changes were a response to political pressures over a flight of companies from U.S. tax jurisdiction via offshore mergers and may directly impact announced, but still pending, deals including the Medtronic/Covidien and Mylan/Abbott Laboratories mergers. The public response from private-sector lobby groups was profoundly negative.
More U.S. housing data on deck. July FHFA housing price data will be released this morning at 9 am U.S. Eastern time, with forecasts for a flat reading from June’s 0.4 percent increase. While the index saw a significant lift in aggregate in May, the year-over-year rate of change marked a sequential contraction.
Tesco announces new leadership. U.K. retail giant Tesco announced the appointment of Alan Stewart to CFO, a leadership move months ahead of schedule, in the wake of the announcement yesterday of accounting issues that would require an earnings restatement. In a media statement Sir Richard Broadbent, chair of the firm’s board of directors, said that he would not step down willingly.
Portfolio Perspective: Still no Hard Landing in China — Karl Haeling, Landesbank Baden-Württemberg
There now appears greater recognition of weakening economic trends in China and the government’s reluctance there to provide significant stimulus. Comments yesterday from China Finance minister Lou Jiwei, that the Chinese economy is not going to shift dramatic economic course because of weak numbers on one indicator, really were not new. Chinese officials and official media in Beijing have been saying this fairly consistently for a while. But many market participants were nonetheless hopeful that a big support package could still be coming. These hopes now appear to be fading.
It is quite possible that a variety of technicals and market-opening initiatives could keep Chinese equities from falling dramatically unless we see a hard landing in China’s economy. The commodities market, though, is far less insulated. Many commodity prices have already fallen considerably, suggesting reduced inflation pressure for the U.S. and increased deflation risk for many other parts of the world. The one positive we see for commodities right now is that they are already heavily oversold. This could lead to a technical correction sooner rather than later.
Final demand is weakening, however, and it appears as if China has been hoarding many commodities in recent years. As such, actual market demand will be even softer in some cases as China starts to reduce its bloated inventories. The Financial Times even speculated Monday that China is facing a “balance-sheet recession” in which deteriorating credit conditions overpower the effect of lower rates and increased liquidity.
One element of the cash injections from the People’s Bank of China involved the failure of Treasuries to rally more than they did given the bullish backdrop of China’s slowing economy and weakness in risk asset markets. There are various reasons for this. One is that with Japanese markets closed Tuesday, investor buying there is less likely immediately ahead, particularly as Japan heads into its fiscal half-year end. Secondly, sell-offs in equities have consistently proven to be good buying opportunities in recent years. So it will take long-lasting weakness in the stock market to panic fixed-income investors. The bond market also recognizes the oversold nature of commodities and faces supply pressures of its own this week.
Karl Haeling is head of strategic debt distribution at Landesbank Baden-Württemberg‘s New York office.
