As investors wonder just how “hard” the economic landing will be in different countries around the world, PMI figures have taken on a new significance lately. This week saw some important developments in China and the US that will likely cause investors to take a close look at the leading indicator for future economic growth.
The Purchasing Managers Index (PMI) is seen as predictive of where the markets will go, because it shows companies’ confidence in demand. If companies expect activity to improve, they will buy more raw materials to get ready for increased demand. Companies will see less purchases if the economy is expected to underperform.
A Series of Important Indicators
Last Tuesday, Chinese authorities previewed a series of sweeping stimulus initiatives meant to get the fledgling economy back on track. That included a promise to radically cut the main interest rate (RRR) “soon”, as well as support the housing industry. A little later, the Fed’s Redbook was published, showing the worst results in years. Additionally, the German Ifo survey of business confidence hit the lowest it has been since the pandemic, leading analysts to conclude the largest economy in Europe was already (once again) in recession.
Investors are looking to see if the readings stay above or below 50, as that is the line separating expansion and contraction. Several economies have seen contraction in their manufacturing sector for years at this point, an indication of economic stagnation. This is particularly important for forex markets, because slow or (negative) GDP growth means central banks will have to ease more. With a “race to the bottom” on interest rates, currencies are likely to fluctuate as economic performance dictates expectations for monetary policy.
What the Market is Looking For
China goes first with its manufacturing PMIs, in a somewhat unusual situation where both official (NBS) and private (Caixin) measures are released on the same day. This will be interesting because the survey was conducted almost entirely before last week’s stimulus announcement. Meaning that a return to expansion would imply the stimulus would have an even greater effect. But if it stays in contraction, markets could dismiss the data as likely to be revised given the stimulus.
China September NBS manufacturing PMI is expected to return to expansion by the bare minimum and score 50.0, up from 49.1 prior. Meanwhile the Caixin measure is expected to accelerate into expansion at 51.0 compared to 50.4 prior. The private measure covers a wider range of smaller companies that typically are more export focused.
Confirming the Bad News
Germany is expected to confirm that its September manufacturing PMI dropped to 40.3 from 42.4 prior, as was reported in the flash numbers. This would drag down the whole of the EuroZone manufacturing PMI to 44.8 from 45.8 prior, suggesting that the “sick man of Europe” is contagious.
The UK, on the other hand, is expected to confirm its September manufacturing PMI stayed in expansion at 51.5, but down from 52.5. Analysts are pointing to businesses being increasingly uneasy about the future, particularly with the talk of raising taxes in the next Budget. That could eventually translate into weakness in the pound if slower economic growth reduces the BOE’s ability to keep rates higher than its peers.
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