Global Manufacturing Readings
The fourth quarter of 2012 began with global manufacturing readings. Despite clear evidence that manufacturing in Asia is weak and recessionary in Europe, markets have shaken off the disappointment overnight and traded higher. I suggest this reaction indicates the knowledge by the investment community that central banks will remain present to support growth.
Markets have priced in the weakness in Europe and China. What is not priced in would be a sharp contraction in manufacturing, in particular for Germany and China. Overnight readings do not present that evidence.
• September PMI was reported at 49.8, above last month’s 49.2, however, below consensus estimates of 50.1 (Figure 1.1)
o New orders rose to 49.8 from 48.7 last month
o New export orders rose to 48.8 from 46.6 last month
o Inventories of finished goods fell to 47.9 from 48.2 last month
o Inventories of raw materials rose to 47.0 from 45.1 last month
o Input prices rose to 51.0 from 46.1 last month
o Imports rose to 47.7 from 47.0 last month
CHINA COMMENTARY – This is the second consecutive sub-50 PMI reading. That last happened in January and February of 2009. The sub-50 reading also defies the historical pattern, which suggests September is typically a strong month for manufacturing. My fourth quarter commentary and playbook “Where’s The Euphoria?” will be published at some point this week. Within it I highlight how investors should incorporate China’s current soft economic climate in their portfolios. Investors should view this morning’s disappointing PMI two ways: First, the demand for materials that drives strong performance for natural resources, material corporations is still absent, and so should be overweight positioning in those sectors. Second, for those pontificating upon a “hard landing” for China, this morning’s PMI does not provide the evidence to support that thesis.
• Spain 44.5 vs. 44.0 last month; consensus estimate was 44.2
• Italy 45.7 vs. 43.6 last month; consensus estimate was 44.0
• France 42.7 vs. 42.6 last month; consensus estimate was 42.6
• Germany 47.4 vs. 47.3 last month; consensus estimate was 47.3
• United Kingdom 48.4 vs. 49.5 last month; consensus estimate was 49.0
EUROPEAN COMMENTARY – Continued sub-50 readings remain recessionary, however, modest improvements, for Germany in particular (Figure1.1) are worth noting. For investors who have sought European investments outside the eurocurrency via the United Kingdom, this morning’s figures are troubling. Recent adoptions of strict austerity measures within the U.K. appear to be too much at the current time given the recessionary environment.
Figure 1.1 China PMI, October 2008 to Present
Figure 1.2 German PMI, October 2008 to Present