Ole Hansen
Ole Hansen, Saxo bank's Head of Commodity Strategy, analyses the opportunities available as the vicious circle of low commodity prices and and EM weakness looks like it's being broken.
Article / 03 June 2013 at 4:30 GMT

3 Numbers To Watch: German PMI, EU PMI, US ISM

editor/analyst /
United States

Several updates on manufacturing activity for May via purchasing managers surveys are scheduled for Monday. Although the flash estimates are already known for most of the releases, today’s revisions will be closely watched for additional perspective on the trend. Indeed, the OECD last week issued a slightly more pessimistic outlook for the Eurozone economy, which prompted the group's recommendation that the European Central Bank cut its deposit rate to below zero and begins issuing forward guidance on the inflation outlook. It'll be interesting to see if there's a reaction at the ECB's monetary announcement on Thursday. With that in mind, keep an eye on today’s PMI releases for Germany and the Eurozone for any changes in these leading indicators. In the US, the ISM Manufacturing Index will be a key number to watch for the trading day ahead.

Germany PMI Manufacturing (07:53 GMT): Manufacturing output rebounded modestly in May, according to the flash PMI estimate of 49.0 (up from 48.1 in April). Analysts think that number will hold in today’s final report. That’s a reasonable assumption, in part because the mood brightened a bit in Germany’s business community, or so the Ifo Business Climate Index for industry and trade in May advises. But while Ifo’s headline index turned higher for the first time since February, the expectations component was unchanged. That’s a reminder that Germany’s economy, though it grew slightly in the first quarter, remains vulnerable while the Eurozone recession rolls on.

The slightly higher headline flash estimate for May is a step in the right direction, but the new orders component in the services PMI data slumped the most since last September while the pace of new orders for manufacturing was flat. That's worrisome after what may be an early sign of a new round of stagnation for the German labour market. As Bloomberg pointed out last week: “German unemployment rose more than four times as much as economists estimated in May as the euro area’s sovereign debt crisis and a long winter took their toll on Europe’s largest economy.” To the extent that there’s optimism that the Eurozone economy will at least find a floor in this year’s second half, the hope still depends on growth in Germany as a foundation for broader stabilisation. Suffice it to say, downside surprises at this stage for Europe’s last line of macro defence can’t be dismissed, which is why the market will be closely watching today’s PMI release for evaluating where we go from here.


EU PMI Manufacturing (07:58 GMT): Today’s final estimate on manufacturing activity for May in the Eurozone is likely to match the flash estimate for May. But no change is still troubling because the flash estimate reminds in no uncertain terms that recession continues to squeeze the continent. That’s obvious from any number of macro perspectives, including last week’s April update on unemployment, which again inched higher: 12.2 percent.

A big part of the problem is Europe’s second-largest economy, and the outlook remains grim. "We do not see a stabilisation in unemployment before the middle of next year," one economist tells the BBC. "The picture in France is still deteriorating."

Even if the Eurozone PMI holds steady versus the flash estimate, the state of Europe’s economy remains in a “dire situation,” warns OECD chief economist Pier Carlo Padoan. “We think that the Eurozone could consider more aggressive options,” including below-zero interest rates. If today’s PMI number is revised down from the initial estimate, that recommendation will resonate a bit more persuasively ahead of Thursday’s ECB monetary announcement.


US ISM Manufacturing Index (14:00 GMT): The weak income and spending numbers for consumers in last week’s update rattled sentiment, which contributed to a sharp drop in the US stock market on Friday. Personal income was flat and personal consumption expenditures fell 0.2 percent in April, the government reported. Is this a prelude for more of the same with the still-mysterious economic profile for May? Today’s update on the widely followed ISM Manufacturing Index offers an early clue.

Manufacturing activity has been slowing in recent months, according to this benchmark. That’s also the message in the Markit US Purchasing Managers Index, which posted a slight dip for May in the previously released flash estimate (the revised number for May will be published today at 12:58 GMT, or about an hour ahead of the ISM release). Although the consensus forecast sees a modest improvement in today’s ISM report, my econometric modeling suggests that we might see this index slip again, falling dangerously close to the neutral 50 mark. Whatever comes, today’s update will shape expectations for the main event this week with US economic news: Friday’s payrolls report for May.





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