Market Overview

3 March 2020

Manufacturing Activity in the US and Europe Is Surprisingly Higher than Before the Coronavirus


While there is some relief in the stock market sentiment, more and more attention is shifted to the economic data field. The first few days of this week provide quite an interesting set of February statistics on business activity from all over the world that could be useful for the analysis of the economic fundamentals. It's time to face the reality with the market just a little tired of the "escape from virus chimeras" mode.


A possible extension (or not) of shares' prices recovery may also depend, of course, on the market's sentiment to particular news releases. That was clearly confirmed on Monday by the growth of many shares in New York in the early hours, most likely in response to the Manufacturing Purchasing Managers Index (PMI) report issued by the Institute of Supply Management (ISM). The so-called diffusion composite (total) February's reading for the Manufacturing PMI came out at 50.1 after 50.9 in January. Technically it looks worse but only if all the potential negative impact of coronavirus news on business sentiment is forgotten. Statistics have shown that the manufacturing environment is not so discouraging. That is especially noticeable in contrast to the same data for the last four months of 2019 when the Manufacturing PMI was around 48 points, and not to forget that any readings above 50 indicates some expansion in the sector - a number below 50 indicates some contraction or at least expectations of contraction. The surprise is that both January and February data for 2020 are better than "before coronavirus" figures (see the Pic 1).

Pic 1. US ISM Manufacturing PMI for the last five years

Source: Investing.com


The PMI Report in the US is based on the data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. For each of the following segments (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers Inventories, Employment, and Prices) a corresponding part of the report shows the percentage that corresponds to each response, the net difference between the number of positive and negative responses represent the economic direction. The diffusion index includes the percent of positive responses plus one-half of those responses that remained the same (that were marked as unchanged). The result is a single index number, and it maybe seasonally adjusted later. The components of the single index are included with varying weights which are 30% for New Orders, 25% for Production, 20% for Employment, 25% for Supplier Deliveries and 10% for Inventories.


The same surprising data came from Germany with similar Manufacturing PMI statistics and from the Eurozone as a whole: the February data released on Monday was even higher when compared to both January 2020 and the last months of 2019 (see the Pic 2 and 3).


Pic 2. Germany's Manufacturing PMI for the last five years

Source: Investing.com


Pic 3. Eurozone Manufacturing PMI for the last five years

Source: Investing.com


The readings from France were somewhat lower but were almost at the same stable level near 50 points as in the last 15 months, and below 50 points for Italy but also higher than in the second half of 2019 (see the Pic 4 and 5). Although some decrease in business activity and consumption in Italy could be expected in the following months, for obvious reasons, but at least the situation was quite normal until the very end of February.


Pic 4. France Manufacturing PMI for the last five years

Source: Investing.com


Pic 5. Italy's Manufacturing PMI for the last five years

Source: Investing.com


None of the above, of course, means that investors can feel relaxed. Vigilance is still required as long as the world is facing a huge epidemic threat. But perhaps the words of the World Health Organisation's director-general Mr Tedros Adhanom Ghebreyesus should be remembered. Ghebreyesus unexpectedly expressed his opinion on the financial markets by saying to CNBC's Hadley Gamble during a panel discussion at the King Salman Humanitarian Aid Center's International Humanitarian Forum in Riyadh that "global markets … should calm down and try to see the reality... We need to continue to be rational. Irrationality doesn't help... We need to go into the numbers, we need to go into the facts, and do the right thing instead of panicking. Panic and fear is the worst,. Going to the probability of a pandemic he added: "Based on the facts on the ground, containment is possible. But the window of opportunity for containing it is narrowing. So we need to prepare side by side for a pandemic. Containment works. But at the same time we cannot be sure. This thing could change direction and be worse. That's why we prepare for the worst."


If the medical issues are not considered, and the economic and financial reality is only highlighted, then it could be considered that the February economic expectations fell only in: Сaixin Manufacturing PMI was 40.3 and Non-Manufacturing PMI was 29.6 in China after 54.1 in January. That is really reflecting adverse expectations and a sharp decline in business activity. However, even in the eye of the virus, the stock markets and the Renminbi are very stable now with the help of the People's Bank of China's (PBoC) large financial injections.


The Reserve Bank of Australia (RBA) on Tuesday also provided support to the markets by cutting interest rates. The markets are expecting the same from the U.S. Federal Reserve (Fed) on March 18. The Governing Council member Pierre Wunsch from the European Central Bank (ECB) said on Monday that the impact of the virus can lower ECB's growth projections, and if there is a risk of a recession the ECB must do everything possible. But the European economy is not in a recession now, jobs are still being created, so "ECB doesn't have to act on every negative shock", Wunsch said That may sound reasonable while the ECB already maintains simulative policy at very high level.


In the light of all the positive indicators on the industrial PMI that surprised the markets enough, it could be interesting to see the exact figures for the service PMI in the Euro area, in the UK and in the US this Wednesday. It is important to compare the service PMI by ISM in the US with another service PMI indicator released by the Markit on February 21. The last one has become the main sell-off trigger as it performed a sharp decline at the time of its release.


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