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Monday, April 23, 2012

The Markit PMIs Are Coming Out

China's Manufacturing & Output came in at 49.1, which is better than March. And that's good, but employment is contracting also. New orders and new export orders are marginally contracting. But take a look at the graphs at the link - new export orders are leading new orders, which suggests that domestic demand is quite weak. Finished good stocks were reported as stable. The prior month they had fallen, which suggests the reason for the uptick from the 48.3 to 49.1. It doesn't imply much expansion next month, does it?

HSBC comments that further fiscal easing will be applied to boot the economy. I'm sure the Chinese government will attempt it; YoY consumer prices for food are still up 7.6% over the year, with fuel prices up 7.4%. Rural food inflation is now lower than urban, but rural fuel inflation is higher than urban at 8%. So China doesn't have huge room for fiscal extravaganza. Also they are already rolling some bad loans, but there is a limit to that.

So what about prospects for export orders? We also got Eurozone PMI, along with French and German PMIs. These are flash.

Eurozone continues to weaken. Manufacturing at 46, services at 47.9, and composite output at 47.4 don't provide any flashes of optimism. The composite output index fell from 49.1 in March to 47.4 for flash April. By this point generally you'd want to throw some government spending into the mix; prospects for that in Europe at this time are poor.

Germany is the bright spot, with a composite output index at 50.9. Services are still holding this up at 52.6. However manufacturing leads, and flash manufacturing at 46.3 this month plus an output index of 47.8 are surprisingly daunting. It's likely that some of the good services number is related to solar installations, which were at a level between 3 and 4 times greater in the first quarter compared to first quarter 2011. The feed-in tariffs continue to be cut, so that is going to wear itself out. Higher fuel and electricity prices in Germany are feeding the solar installations. Employment gains in Germany came to a halt according to this survey.

France is a little further along the OMG curve than Germany. The French manufacturing output index rose from March's deplorable 45.6 to 47.7 flash April. That is still firmly in the contraction zone, but it does provide some hint that services contraction this month will slow in one to two months. And it had better - Services fell from 50.1 in March to a putrid 46.4.

Hah! When I checked the US 10 year this morning, the yield was at 1.92. That will bobble, but sentiment on the dollar will now assist inflows. The yuan is far more likely to fall than rise, and Europe doesn't seem to be at the end of its recession, nor can Euro confidence be sustained.

The German and French economies are powerfully linked; the French numbers are disturbingly negative and raise strong questions about the trajectory of the German economy this summer.

That tentative floor on the US 10 year yield of 1.88 is now more like 1.85 to 1.88 (30 days), but further than that I cannot go. My gut is that the US consumer economy is on a slight uptick, but it is always hard to assess at this point in the year. A lot is going to depend on the American consumer, and the American consumer is a fickle critter, but one with a strong default propensity to spend. However the US consumer is strapped, and the advertising I hear on cars indicates the demand edge is closely aligned with the "cannot afford" edge. Kelloggs, baby - Kelloggs! Surprises to the upside are limited and surprises to the downside are not as limited.

As for the IMF's forecast, I think it is an exercise in self-delusion. We have interacting and reinforcing waves of weakness washing back and forth across the global economy. The commodity bubble is going to quietly deflate, and that's going to push money around into different investments. Eventually lower input costs are going to offset some of this weakness, but in the meantime we have a rocky few months ahead, and it is possible that any single government may crack and begin throwing enough money into the pot to offset the necessary and inevitable commodities sag. That would produce a lower and longer bottom.

For example, there is no clue as to what the ECB will do - by now those folks must be pissing their britches, and German opposition to various measures is likely to fade as the German economy weakens.

I came up with a shockingly low number for the US 10 year yield this summer - it's so low that I don't believe it. Therefore I'm not going to disclose it. There is no demand for money right now - the poorer quality corporate bonds are beginning to fail, commercial paper ain't going nowhere, it appears to be fund money only that is sustaining commodities - the risk edge is moving out for better returns, and the game is on.


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