Markit Releases Flash PMI Data
Markit and HSBC have released a number of Flash PMI reports, which continue to point to a globally synchronized economic slowdown. On this occasion it is worth quoting Fedex CEO Fred Smith on the topics of global trade and China's economy (this was uttered during Fedex's rather sobering earnings conference call):
On global trade:
Fundamentally, what's happening is that exports around the world have contracted, and the policy choices in Europe and the United States and China are having an effect on global trade. Global trade has grown faster than GDP, except for the 2000, 2001 meltdown and 2008 and 2009, for 25 years. And over the last few months, that has not been the case. So that's what's really going on, is that exports and trade have gone down at a faster rate than GDP has.
I can tell you this on China. The locomotive that has driven China’s growth is its export industries. And with the situation in Europe and, to a lesser degree, in North America, that is a significant issue for the Chinese economy. Now the consumer consumption in China is not increasing at a significant rate contrary to everybody’s hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted — grown at a far lesser rate or, in the case of certain European countries, have contracted, that’s reflected in the numbers in China. And you can’t escape that. I’ve been somewhat amused watching some of the China observers, I think, completely underestimate the effects of the slower exports on the overall China economy.
This is something that has become evident in the first post "GFC" recession already: China is basically akin to a warrant on Europe and the U.S. Its economy is geared toward exports, and whenever exports decline, it reverberates through the entire economy. It is therefore no big surprise that the HSBC Flash PMI once again showed the contraction continuing.
Bad Fundamentals News, but Stock Markets Are a Different Story
However, we would point out here that the Shanghai stock market seems to reflect a lot of this weakness already. EWI has published an interesting report on the long-term wave count of the Shanghai market (a download link can be found here). It argues that the current confluence of negative sentiment (which is the opposite of the positive sentiment that attended the top of the third wave in 2007) argues for the idea that the current bear market will soon end, or at the very least give way to an upward correction. Here is another link to an EWI article on China that shows that the Shanghai market quite often correlates negatively with the SPY. We would note to this that although the SSEC has just dropped to a new correction low, there are some early-stage signals from related markets in evidence that suggest that a relief bounce may be near. For instance, the U.S.-listed coal and steel ETFs have recently enjoyed surprisingly strong short-term rallies.
The Coal stock ETF KOL appears to have bottomed after a vicious bar market that ended with the bankruptcy of U.S. coal producer Patriot Coal. It happens very often that bear or bull markets end with such news. E.g. crude oil's bull market ended in 2008 shortly after a commercial hedger was bankrupted due to margin calls on its short futures contracts in WTI crude
(click charts for better resolution)
A long-term chart of the Shanghai Composite shows that wave C of the bear market since the wave III top in 2007 is currently underway. When it ends, there could be a strong rally back to the wave B high (EWI suggests that ultimately, the entire corrective process will involve a wave D up and another wave E down)
On a daily chart of the Shanghai Composite the most recent 5-wave down move is easily discernible. Note that momentum divergences are emerging concurrently with the market producing new price lows. At a minimum one would expect some sort of corrective rally to begin soon
We won't pretend that we know at what level precisely the above discussed C wave will find its low. This is merely a heads-up for traders that it may be a good time to keep a close eye on the Shanghai Composite for signs that a low is forming. Even if the subsequent rally is only corrective in nature, it could be well worth playing. If you think it is not possible for a stock market to produce a big rally while economic fundamentals are crumbling, take a look at the recent action in Spain's IBEX or Greece's Athens General.
The Athens General Index: a huge stock market rally in the middle of the worst economic depression since the 1930s
Finally, a chart from our friend BC that shows an overlay of the Shanghai Composite and the Nikkei, with their respective tops aligned. Even if one adopts a longer term bearish view on Chinese stocks, this chart analog suggests that a short term low is probably close
The PMI Data
The fact remains though that global economic data continue to show ongoing deterioration. Below are links to the Flash manufacturing PMI reports (all in pdf format) plus a few brief comments and charts.
Flash PMI data links:
China manufacturing PMI (HSBC) : the pace of the contraction has slowed a bit, with the PMI improving from 47.6 in August to 47.8 in September – but obviously the contraction continues.
China's HSBC PMI remains in contraction territory: this differs from the "official" data insofar as it canvasses only private sector companies, and not state-owned ones
Another noteworthy data point is the balance sheet of the PBoC – due to capital outflows from China, it has begun to shrink. This is why we always point out that the lowering of reserve requirements is not necessarily a sign of easier monetary policy. In China, it currently simply reflects the fact that money has begun to flow out instead of in. As a result, it seems clear that the Yuan is no longer a one-way bet. We think it rather likely that it will actually fall, not rise.
The change in the size of the balance sheet of the People's Bank of China, absolute and as a percentage of GDP (via alsosprachanalyst.com) – as opposed to what is happening elsewhere, it has actually begun to shrink, as capital flows out
Euro Area manufacturing PMI – comment by Markit's chief economist:
The Eurozone downturn gathered further momentum in September, suggesting that the region suffered the worst quarter for three years. The flash PMI is consistent with GDP contracting by 0.6% in the third quarter and sending the region back into a technical recession.
At 45.9, down from 46.3 in August, the euro area manufacturing PMI is still nothing to write home about
Germany composite PMI: Germany was actually a bright spot in that the pace of the overall PMI contraction appears to be easing quite a bit, with composite PMI increasing from 47 in August to 49.7 in September. However, as Markit's chief economist remarks:
Germany managed to shake off the summertime blues in September, with renewed services growth helping to stabilize private sector output as a whole. Manufacturing also made a contribution to the slightly less gloomy picture, albeit simply by achieving a slower contraction of production compared to August.
However, the halt to the private sector downturn seems to have a fragile veneer, given the reliance on pipeline projects over new business to stabilize output. A lack of incoming new work, combined with a sharp drop in year-ahead expectations for activity, meant that service providers cut back on staffing levels at the most marked pace since May 2009.
France flash PMI: new triumphs of socialist economic management are recorded in France, where economic output has recorded its sharpest decline since April of 2009. Composite PMI fell from 48 in August to 44.1 in September, while the manufacturing output index plunged to 39.8 from 45.3 in August – a 41 month low.
Maybe it wasn't such a good idea to raise the top marginal tax rate to 75% and replace crumbling private sector jobs with new bureaucratic jobs in an already bloated administration. But hey, Hollande and his "industrial renewal" minister Montebourg surely know best. After all, they have a "growth agenda."
France's PMI composite takes a dive to the 44.1 level
U.S. – Flash manufacturing PMI : note that this differs from the ISM data (which are somewhat weaker). The third quarter as a whole produced the weakest PMI reading since Qu. 3 of 2009, and output rose at its slowest pace in three years during September. Comment from Markit's chief economist Chris Williamson:
U.S. manufacturers reported another month of tough business conditions in September, rounding off the weakest quarter for three years.
With output growing at the slowest pace since the recovery began in October 2009, the manufacturing sector may have even acted as a slight drag on the economy in the third quarter. Gross domestic product therefore looks likely to have expanded at a
much weaker pace than the 1.7% annualized rate seen in the second quarter, slipping closer toward stagnation.
There you have it – the global economy remains under pressure. No wonder central banks are panicking. Of course, contrary to what they believe, printing more money cannot possibly solve the problem. In this context we would like to point our readers to a recent speech by one of the Fed's few remaining hawks, Dallas Fed president Richard Fisher. The most interesting passage from the speech:
There are many superb PhD theorists among the 19 members of the FOMC and support staff. There are only a handful of us—four, to be exact—who have worked as bankers or in the financial markets.
Those "superb PhD theorists" are unfortunately all wedded to theories that seem more akin to astrology than science. They may have good intentions, but that is after all what the road to hell is always paved with.