Perhaps the most interesting question from late yesterday is just how did the Chinese PMI rebound from 50.4 to 50.2, when the bulk of its most important forward-looking components, New Orders, Output, New Export Orders...
... posted a material deterioration? When asked, not even Markit could provide an explanation that seemed remotely reasonable so we can only assume the headline was goalseeked purely for the kneejerk reaction benefit of various algos that only focus on the headline and nothing else. Luckily, we didn't have much time to ponder this quandary as a few hours later we got the latest batch of Eurozone PMI numbers.
The reason the PMI "soft-data" surveys are relevant, if mostly again for the benefit of kneejerk reacting algos, is because as Deutsche Bank said, "These real time numbers are clearly going to be important at the moment with many fearing an inflexion point in the global data." So what better way to instill some confidence in a triple-dipping Europe, if only on actual "hard" data, than by providing cherry-picked, seasonally adjusted survey responses.
And sure enough, Markit did not disappoint when following an ugly French PMI number (because as we have shown before, France is long gone from anyone's idea of Europe's core), which printed at 47.3 for Manufacturing, down from 48.8 in September, and below the 48.5 expected, and a Services print of 48.1, down from 48.4 and below the 48.3 expected, we got yet another magical turnaround in Europe, driven once again by Germany, whose Mfg PMI printed at a whopping 51.8, far above the contractionary 49.5 which was expected, and up from the 49.9 contraction Markit reported a month ago. This was the highest reading since July 2014, and up from the 51.7 reported a year ago. It was high enough to offset the tiny decline in the Services PMI which dipped from 55.7 to 54.8 below the 55 expected. This in turn helped boost the composite European PMI to 52.2, from 52.0, above the 51.1 expected, driven by a rise in manufacturing from 50.3 to 50.7, below the contractionary print of 49.9 expected, even as Services remained flat at 52.4.
Ironically, just like in China, new orders were flat but the forward-looking orders-to-stock difference fell 0.8pt! But as long as the headline number picked up all is well, and judging by the violent reaction in USDJPY and futures, Markit achieved its mission for the day.
This is how Goldman summarized Europe's Deus Ex PMI data:
The Euro area composite PMI edged up by 0.2pt to 52.2 in October, against consensus expectations of a contraction (Cons: 51.5, GS: 51.2). The rebound in the composite PMI was driven by a 0.4pt increase in the manufacturing component to 50.7, while the services PMI was flat at 52.4. The level of PMIs continues to point to small positive growth rates in Q3 and now early Q4.
1. The manufacturing PMI increased marginally from 50.3 to 50.7 in October, after five months of consecutive declines. The services PMI was unchanged at 52.4 (Exhibit 1). The consensus expectation was for small declines in both the manufacturing and services PMI.
2. The breakdown generally showed a mixed picture. New orders were flat but the forward-looking orders-to-stock difference fell 0.8pt. Other subcomponents of the manufacturing PMI were more positive, with output rising 0.9pt and employment rising 0.5pt. The forward-looking subcomponents (which are not part of the headline services PMI figure) were weak: 'business expectations' fell 3.1pt and 'incoming new business' fell 1.1pt.
3. In addition to the Euro area aggregate, Flash PMIs were released for Germany and France. The German composite PMI edged up 0.2pt to 54.3, against consensus expectations of a 0.5pt decline (Cons: 53.6). This was driven by a strong 1.9pt increase in the German manufacturing PMI (while the German services PMI eased 0.9pt). In contrast, the French composite PMI printed at 48.0 in September, 0.4pt below the previous month's reading, against consensus expectations of a small increase (Cons: 48.7). The French PMI decline was driven by weakness in the manufacturing sector. In a separate release, the French INSEE manufacturing confidence survey sent a diverging signal, posting a small 1pt increase to 97. Overall, the German/French PMI gap widened by 0.6pt in October and is now greater than 6pt (Exhibit 2).
So what does the latest PMI print imply for GDP? Goldman said that "based on historical correlations, a reading of 52.2 is associated with +0.2%qoq GDP growth. In the same vein, our CAI points to similar growth in October (+0.2%), in line with the September reading." Well, it is positive...
But the best indication of just how ridiculous the headline prints were came from Markit itself, which clearly did not believe the numbers it had reported: This is what Markit's Chris Williamson said:
“The Eurozone PMI rose in October but anyone just watching the headline number misses the darker picture painted by the survey’s other indices, which show the region teetering on the verge of another downturn.
“Growth of new orders slowed closer to stagnation and backlogs of work fell at a faster rate, causing employment to be cut for the first time in nearly a year.
“Business confidence in the service sector also slid to the lowest for over a year and prices charged fell at the fastest rate since the height of the global financial crisis, adding to an increasingly downbeat assessment of business conditions.
“While the survey suggests the euro area has so far avoided a slide back into recession this year, a renewed downturn cannot be ruled out. Growth is so anaemic that increasing numbers of companies are being forced into laying off staff and slashing prices in an attempt to cut costs and boost sales through discounting."
The message is clear: we needed a stronger headline number, but weak enough to prompt the ECB to do something. Good luck.
In other news, Asian equities traded on a sombre note following suit from yesterday’s negative Wall Street close, led by weakness in energy shares amid a sharp drop in oil prices. Hang Seng (-0.3%) and Shanghai Comp (-1.0%) traded lower, shrugging off a better than expected Chinese HSBC manufacturing PMI (50.4 vs. Exp. 50.2), as new orders and output (50.7 vs. Prev. 51.3) metrics fell, the latter printing at the lowest since May’14. The Nikkei 225 (-0.37%) finished the session in the red in a continuation of the negative US close while also tracking the move lower in USD/JPY overnight.
Despite opening in the red in a continuation of the move lower seen on Wall St. and overnight, European equities enter the North American open in a sea of green with the exception of the FTSE 100. Despite a lower than expected French PMI release, with all three components falling short of expectations which initially placed further weight on equities, attention instead turned towards the strong German and Eurozone PMI releases. With the data points going against the grain of recent lacklustre Eurozone releases, European equities emerged back into the green with the DAX moving higher by a total of 150 points, which subsequently dragged fixed income products lower as Bunds moved back below 150.50. On a sector specific basis, telecommunication names lead the way following strong earnings updates from the likes of Nokia, Orange and Tele2.
Looking forward, we will get initial jobless claims (expected in at 281k vs +264k previously). We will also get earnings reports from the likes of Credit Suisse, Daimler and Tesco in Europe, and American Airlines, GM, Microsoft and Amazon in the US.
Bulletin Headline Summary from Bloomberg and RanSquawk
- European equities shrug off lacklustre French and Chinese PMI releases as attention turns towards better than expected German and Eurozone figures, while the FTSE 100 remains firmly in the red.
- UK retail sales (Ex Auto M/M -0.3% vs. Exp. 0.0%), provide a further source of concern for the UK economy, which subsequently saw GBP/USD briefly break below 1.6000.
- Looking ahead, attention turns towards the release of the weekly US jobs data, US manufacturing PMI as well as a host of large cap. US earnings including the likes of Microsoft, Comcast, Caterpillar, Eli Lilly, GM and Amazon.
- Treasuries steady, 10Y and 30Y yields at highest since early October as market focus begins shifting to next week’s Fed meeting.
- Fed is slated to complete $10b of UST purchases in October next week; those will be the final events of QE3 “if the FOMC decides to end its current program of asset purchases at the next meeting,” schedule says
- A China manufacturing gauge rose in October, with HSBC/Markit’s PMI rising to 50.4 from 50.2 the previous month
- Markit’s euro-area manufacturing PMI rose to 50.7 in October from 50.3; in Germany, factories rebounded from a slump in September while in France both services and manufacturing shrank more than forecast
- ECB has purchased more than EU800m of covered bonds in the first three days of its asset-purchase program, according to estimates from three traders
- U.K. retail sales fell 0.3% in September, more than forecst, with clothing and footwear sales dropping 7.8%, the most since April 2012, the Office for National Statistics said in London today
- Terror reached Canada this week when a “radicalized” convert to Islam on Monday ran down and killed a soldier with a car and a gunman yesterday invaded the capital and murdered a soldier at a war memorial before entering Ottawa’s parliament building where he was shot to death
- The attack may add fuel to a more than decade-long debate over the country’s participation in U.S.-led military operations in the Middle East that has divided political parties and public opinio
- Heightened U.S. regulatory scrutiny of leveraged lending is leading the biggest banks to back away from funding some takeovers financed by debt, creating an opportunity for smaller competitors to step in
- Goldman Sachs Asset Management used the recent selloff in U.S. high yield bonds as an opportunity to add to its position, betting that a strengthening of the world’s largest economy will keep defaults low
- Sovereign yields mostly higher. Asian stocks decline, European stocks mixed, U.S. equity-index futures gain. Brent crude gains, copper and gold fall
US Event Calendar
- 8:30am: Chicago Fed National Activity Index, Sept., est. 0.15 (prior -0.21)
- 8:30am: Initial Jobless Claims, Oct. 18, est. 281k (prior 264k)
- Continuing Claims, Oct. 11, est. 2.380m (prior 2.389m)
- 9:00am: FHFA House Price Index m/m, Aug., est. 0.3% (prior 0.1%)
- 9:45am: Markit US Manufacturing PMI, Oct. preliminary, est. 57 (prior 57.5)
- 9:45am: Bloomberg Consumer Comfort, Oct. 19 (prior 36.2)
- 10:00am: Leading Index, Sept., est. 0.7% (prior 0.2%)
- 11:00am: Kansas City Fed Manufacturing Activity, Oct., est. 6 (prior 6)
- 11:00am: Fed to purchase $1.35b-$1.65b notes in 2020-2021 sector
- 11:00am: U.S. to announce plans to auction 2Y/5Y/7Y notes, 2Y FRN
- 1:00pm: U.S. to auction $7b 30Y TIPS in reopening
ASIA
JGBs traded up 3 ticks at 146.32 after tracking overnight gains in USTs and further underpinned by earlier weakness in Japanese stocks. Asian equities traded on a sombre note following suit from yesterday’s negative Wall Street close, led by weakness in energy shares amid a sharp drop in oil prices. Hang Seng (-0.3%) and Shanghai Comp (-1.0%) traded lower, shrugging off a better than expected Chinese HSBC manufacturing PMI (50.4 vs. Exp. 50.2), as new orders and output (50.7 vs. Prev. 51.3) metrics fell, the latter printing at the lowest since May’14. The Nikkei 225 (-0.37%) finished the session in the red in a continuation of the negative US close while also tracking the move lower in USD/JPY overnight.
FIXED INCOME & EQUITIES
Despite opening in the red in a continuation of the move lower seen on Wall St. and overnight, European equities enter the North American open in a sea of green with the exception of the FTSE 100. Despite a lower than expected French PMI release, with all three components falling short of expectations which initially placed further weight on equities, attention instead turned towards the strong German and Eurozone PMI releases. With the data points going against the grain of recent lacklustre Eurozone releases, European equities emerged back into the green with the DAX moving higher by a total of 150 points, which subsequently dragged fixed income products lower as Bunds moved back below 150.50. On a sector specific basis, telecommunication names lead the way following strong earnings updates from the likes of Nokia, Orange and Tele2.
However, to the downside, the FTSE 100 has underperformed throughout the session following Tesco’s (down as much as 7%) pre-market update which revealed a larger than expected overstatement and scrapping of guidance. Further negative sentiment from the UK has also stemmed from UK property seller Foxtons (-15%) who noted a fall in home sales volumes.
Prelim Barclays month end extension for US treasuries +0.08yrs, Pan Euro Agg month-end extensions +0.08yrs (Prev. +0.09yrs), 12-month average +0.08yrs, Prelim Barclays Sterling Agg month-end extensions +0.06yrs
FX
In FX markets, USD/JPY has been one of the notable movers during the European session after breaking above Monday's and last week's highs alongside the move lower in fixed income products as USD/JPY gained amid favourable interest differential flows. The move to the upside was also exacerbated by the pair tripping stops through 107.55 and talk of leveraged names on the bid which also saw the pair break above an option expiry at 107.50. Elsewhere, GBP/USD has been weighed on by a disappointing UK retail sales release (Ex Auto M/M -0.3% vs. Exp. 0.0%), which saw the pair briefly break below 1.6000 to the downside, with the ONS noting that the fall in clothing sales volumes is the biggest since April 2012. NZD was a notable mover overnight, with NZD/USD falling just shy of a point, weighed on by NZ CPI (1.0% vs. Exp. 1.2%) which printed at its lowest level since June 2013, prompting several large investment banks incl. Barclays and JP Morgan, to push back their forecast for next RBNZ OCR hike.
COMMODITIES
Heading into the North American open, WTI and Brent crude futures trade in relatively neutral territory in a modest recovery of yesterday’s DoE inspired losses which saw WTI hit its lowest level in two years, with a lack of further newsflow to dictate price action. Precious metals markets also trade in relatively neutral territory, while residing modestly below yesterday’s lows. However, copper prices have been provided some reprieve following the Chinese manufacturing PMI release, although the move to the upside was capped as attention turned towards the output component of the release. Elsewhere, Anglo American have lifted their annual output targets for all its major commodities with the exception of platinum.
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DB's Jim Reid concludes the overnight recap
Kicking off this morning we’ve already had the flash PMI print in China with the 50.4 reading modestly better than market expectations of 50.2. The benign reading has done little to spark any sort of confidence in investors following the GDP print earlier in the week with the local benchmark unchanged at the time of writing. We’ve also had PMI out of Japan which surprised to the upside, the 52.8 print up from 51.7 in September. Markets in the region are trading mostly in the red. The Nikkei, Hang-Seng and Kospi are -0.2%, -0.3% and -0.3% down whilst in credit iTraxx Asia is +3 bps wider.
These real time numbers are clearly going to be important at the moment with many fearing an inflexion point in the global data. To help take stock this morning we resurrect our simple grid looking at the relationship between manufacturing PMIs and equity markets (using YoY % change). This analysis looks at the correlation between these two variables across a selection of key countries over time and which allows us create a simple regression to see whether any anomalies currently exist.
Of our 8 sample countries plus the Eurozone, seven currently see manufacturing PMIs between 48.8 (France) and 51.7 (Japan). Depending on the country and based on these numbers, our regressions suggest that these equity markets should generally be flat to slightly higher than 12 months ago. In actuality they're slightly lower suggesting that the market expects PMIs to edge lower or that equities are cheap if they don't. The biggest exception is in the US where the last PMI was 56.6 which corresponds to a 18% YoY gain rather than the 11% we actually have. So the US is 'cheap' if the PMIs don't decline from current levels.
We've used this measure less over the last couple of years as central banks have increasingly distorted the relationship between fundamentals and valuation. However all-in-all the relationship looks pretty appropriate over the last 12 months. Those equity markets with lower domestic PMIs are generally the ones struggling and vice-versa. The results are in today's pdf but remember that we always treated this as a back of the envelope guide to value rather than anything more substantial. So treat with care.
In terms of what's expected today, for Europe consensus is for a general slip in the PMI’s, with the euro area composite, manufacturing and services PMI dropping to 49.9, 52 and 51.5 respectively. We will also get the French and German numbers with the market expecting the French composite to rise slightly (to 48.7) whilst the German composite is expected to fall (to 53.6).
Across the Atlantic, we will get the flash US manufacturing PMI which is also expected to fall (though only to 57).
Market performance was mixed yesterday as European assets were broadly up whilst the US struggled. In Europe, the Stoxx 600 closed the day up +0.7% whilst in credit markets iTraxx Xover tightened -6bps. EURUSD fell another -0.4%. After opening on a positive note US equities closed at their lows. The index fell -0.7% whilst credit also struggled with CDX HY widening by +5bps. Markets drifted lower as energy stocks took suffered following an EIA report that showed the US is stockpiling oil reserves at surprisingly high levels for this time of year, WTI sold off 1.9% to trade at close to $80/barrel. The weaker sentiment was further compounded by a mixed batch of earnings releases. Towards the end of the day, news emerged in Ottawa that a gunman had fatally killed a soldier and opened fired inside the parliament building close to the Canadian PM Stephen Harper (BBC). We are yet to hear any confirmation on whether or not the gunman was linked to a known terrorist group.
The main macro release of the day was US September CPI which came in slightly ahead of expectations at +0.1% MoM and +1.7% YoY, whilst estimates of core CPI came in at expectation (at +0.1% MoM and +1.7% YoY). In other headlines the ECB entered its third day of asset purchases, with Bloomberg News reporting it had bought Spanish covered bonds, whilst it is also adding to its French and Portuguese purchases. In other ECB news, ECB Governing Council Member Luc Coene said in an interview with Les Echos that “we could extend our interventions to other instruments such as corporate bonds” but that, “there is no concrete proposal on the table at the moment.” In the UK, the BoE minutes saw sterling fall as the minutes showed that whilst 2 members continued to vote for a hike, 7 opted to keep rates unchanged, with the minutes also showing increased pessimism about the global economy.
Looking ahead European banks will this evening get the results from the AQR, before the full results are released on Sunday. It’s likely that leaks about the results will intensify in this interim period. Data wise, beyond the PMI’s we will get French confidence numbers and UK September retail sales, whilst in the US we will get initial jobless claims (expected in at 281k vs +264k previously). We will also get earnings reports from the likes of Credit Suisse, Daimler and Tesco in Europe, and American Airlines, GM, Microsoft and Amazon in the US.
