After the shock to the market at the start of the month, investors have become a lot more focused on the economy, particularly on Global PMI Data. There are an array of indicators that economic growth is headed for a slowdown. That isn’t so bad for traders, but it increases the risk of the potential for a market crash. Even though it’s usually the stock market that suffers the most in a market crash, currency markets are certainly affected, as well.
The front-runner indicator of economic health is the Purchasing Managers’ Index (PMI), because that tracks how optimistic or pessimistic businesses are about the economic conditions. Large swings to contraction in PMIs often preceded economic slowdowns that can turn into crises. Currencies are moving in the markets as investors price in the relative likelihood of a recession, through shifting yields. If PMI’s show contraction, yields are likely to continue to fall, meaning currencies will weaken. If nothing else, The Global PMI Data released over the weekend and on Monday will be crucial in determining market risk appetite and economic outlook. Here’s what could happen so you can adjust your strategy accordingly:
China: Signs of Contraction Persist
It’s well-known that the world’s second largest economy is struggling to take off, despite the government offering constant increases in support for the domestic market. The trade conflicts have been weighing on the country, and it has seen a significant drop in foreign direct investment. In order for commodity currencies to get their mojo back, China’s economy would need to turn around. Unfortunately, the forecasts don’t point to that happening in August.
China’s official NBS Manufacturing PMI is expected to remain in contraction at 49.3, essentially unchanged from the 49.4 recorded in July. The NBS tracks the larger, mostly government owned businesses, suggesting that the core of the Chinese economy remains weak. The private Caixin index tracks a broader range of companies, and had managed to avoid contraction for a while. But it fell below 50 last month, and is expected to descend to 49.6 from 49.8 prior, showing that the contraction in China is spreading.
Europe: The Rebound that Never Comes
Earlier in the month we got the preliminary measures of PMIs for the major economies in Europe. Investors were expecting an improvement, but they actually fell further into contraction. Now, the forecast is for the German final August Manufacturing PMI to confirm the retreat into contraction to 42.1 from 43.2 prior. French preliminary PMIs were an even larger disappointment, with manufacturing expected to be confirmed to have fallen to 42.1 from 44.0. The shared economy continues to be weighed down by high energy prices, leaving the ECB unable to cut as fast as the sluggish economy would need in order to get a boost.
Meanwhile the UK is seen surging ahead, with its August final Manufacturing PMI expected to confirm the preliminary reading of 52.5, up from the 52.1 reported for July. Economists do, however, expect the UK to slow down later in the year, which would give the BOE some room to start easing. But if the price component remains elevated, the BOE could be among the more hawkish of the big central banks.
Speaking of slowing later in the year, US ISM Manufacturing PMI comes out on Tuesday, and it’s expected to show that the manufacturing sector has remained in contraction, though improved to 47.5 from 46.8. But trackers of the Fed will likely be more interested in the prices paid subcomponent, which is expected to remain elevated at 52.8, just shy of the 52.9 prior. That might be a bit of an obstacle in the narrative that the Fed is cruising for substantial easing.