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Euro$ #4 Turns Three

Summary:
IHS Markit’s Composite US PMI rose to a 10-month high in January 2020. According to its flash estimate, the index was up to 53.1 from 52.7 in the final reading for December 2019. Driven by a rebound in the services component, the composite combines both the manufacturing and service PMI’s into a single number, Markit’s view is that the US economy is experiencing a modest pickup. U.S. private sector firms indicated a faster expansion of business activity in January, with the pace of growth accelerating to a ten-month high. The upturn was driven by a sharper increase in service sector output, as growth of manufacturing production was unchanged. Whether or not it is sustained is the only question, and already there are apparent problems with the idea. First, these PMI’s are noisy in short

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IHS Markit’s Composite US PMI rose to a 10-month high in January 2020. According to its flash estimate, the index was up to 53.1 from 52.7 in the final reading for December 2019. Driven by a rebound in the services component, the composite combines both the manufacturing and service PMI’s into a single number, Markit’s view is that the US economy is experiencing a modest pickup.

U.S. private sector firms indicated a faster expansion of business activity in January, with the pace of growth accelerating to a ten-month high. The upturn was driven by a sharper increase in service sector output, as growth of manufacturing production was unchanged.

Whether or not it is sustained is the only question, and already there are apparent problems with the idea. First, these PMI’s are noisy in short timeframes. In other words, we’ve seen this before, the last time in July when the composite accelerated modestly to near 53. Each time that happens we are told the same thing: the economy has stabilized.

Euro$ #4 Turns Three

That’s entirely possible, of course, and at some point a modest acceleration will stick around (Reflation #4). This one, however, has several indications stacking up against it. Underneath the headline, the combined look at new order activity decelerated suggesting at least softening in the months immediately ahead. Manufacturing orders, the sub-index on the manufacturing side, was the lowest since last September – itself a recent low.

Largely because of that, Markit’s Manufacturing PMI appears to have stalled. Diverging from other manufacturing sentiment indications, this one had rebounded to as much as 52.6 in November. It has been down slightly in each of the two months following. Perhaps downside statistical noise, more likely reverting to the underlying trend.

Euro$ #4 Turns Three

According to Markit, export orders (global demand) are contracting again by a small amount when everyone says the global economy is back on an upward trajectory.

The mainstream story behind this renewed optimism is “transitory” factors that even if they didn’t quite disappear completely in the last six months of 2019, thus no second half rebound, they began to. Expectations, therefore, for a first half rebound, that might indicate the global economy entering 2020 was at least facing the right direction. What Fed Vice Chairman Clarida had claimed recently were abating headwinds and disinflationary pressures around the world

The leading parts, however, like manufacturing and new orders across both segments, are suggesting that may not be the case.

Instead, the numbers are starting to look like Europe where an upturn has been expected (again) and still none shows up. Markit’s flash PMI for the whole European economy, the composite index, stuck at 50.9 in January the same as December. Both months were up only a minor amount since the low of 50.1 reached back in September.

If that’s a QE effect, it’s consistent with past experience (not good) which is never anything like how it’s supposed to come out.

Euro$ #4 Turns Three

QE, though, isn’t required for the hype. When the composite had reached 52.2 in June, three months before the ECB relaunched, we were all treated to the familiar call for a stabilizing system. At the beginning of last July, Markit had said:

After accounting for seasonal factors, the IHS Markit Eurozone PMI® Composite Output Index strengthened to 52.2, up from 51.8 in May (and slightly better than the earlier flash reading of 52.1). June’s PMI reading was also the highest recorded since November 2018, signalling [sic] a pick-up in economic growth of the single currency area.

And it didn’t happen. Each and every small upswing is declared to be a change in trend, while the more serious and frequent downturns are dismissed as temporary factors – even though this has dragged on now in Markit’s PMI terms since January 2008.

By this view, as well as GDP and a whole bunch of other economic accounts, Europe has been on the receiving end of the eurodollar’s squeeze (Euro$ #4) for two full years (give or take a month or two depending upon the specific data point) with no compelling data to suggest its end; just the usual assertions that it has. Outside of statistical noise, the European downturn grinds on if not always in a straight line. Even Markit’s latest press release admitted as much:

Flash PMI data for January indicated that the eurozone economy failed to pick up growth momentum at the start of 2020.

If Europe can’t seem to escape the monetary grip, having been suffering from it far longer, is there really any expectation for the US to materially accelerate beyond? Such a thing would amount to decoupling, which, even Economists have learned, never actually happens.

In other words, if the squeeze is still on Europe, then that means it’s very likely in effect for the global economy as a whole – as suggested in the US numbers, too. Until there is actual improvement, and it will happen quite likely at some point in 2020, the downturn remains in effect and its ultimate depth still an unknown at the start of what is a third calendar year for it.

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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