While markets cheer the fact that the Bank of Japan appears to be picking up the QE baton from the retreating Federal Reserve,
in the process helping to drive US markets to new record highs, and the Nikkei
225 to its highest levels since late 2007, one of the larger elephants in the room appears to have been forgotten for now, as we head into a new week and a new month.
The world’s second biggest economy, China, once again appears to be showing further signs of a slowdown after manufacturing PMI for October slipped back to 50.8
, a five month low, while new export orders slipped into contraction territory, suggesting that despite last week’s stock market euphoria, that one of the concerns that so spooked stock markets three weeks ago still remains a clear and present danger.
Even more concerning was the fact that mid-sized and small factories came in even weaker. Non-manufacturing PMI also slipped back to its lowest level since February this year to 53.8.
Concerns about Europe remain par for the course
and this week’s economic data looks set to reinforce that fact despite some evidence last week that German data might be showing some signs of an improvement.
All eyes this week are set to be on Thursday’s ECB rate meeting
where once again investors will be hoping that the increasing pressure on the ECB will yield some extra action to help boost economic activity.
This remains unlikely, and in the realms of wishful thinking for the time being given the political discussion already taking place in Germany about the measures already being implemented.
While not wishing for further disappointing economic data today’s latest October manufacturing PMI numbers for Spain, Italy, France and Germany could well serve to increase pressure for additional action on the ECB
, particularly if the recent trend of poor Italian and French data continues. Expectations are for slightly weaker numbers of 50.6 and 47.3 respectively, while Spain and Germany are expected to be slightly firmer at 52.4 and 51.8.
The slowdown in Europe also appears to be starting to have an effect on the manufacturing sector here in the UK
with recent PMI data here also starting to show signs of weakness.
September’s PMI reading came in at its lowest reading since June last year, at 51.6 and October doesn’t look as if it could be much better with expectations of a further softening to 51.4, still in expansionary territory but still much lower than the levels we saw at the end of Q2 when we were averaging 57.2.
Despite this recent weakness the US economy continues to broadly outperform on a number of levels,
though the extent of the economic rebound remains patchy, with the US consumer continuing to struggle, despite rising confidence levels.
Sluggish consumer spending patterns continue to diverge from the broader confidence indicators, while the manufacturing sector still looks fairly solid
. Last Friday’s much better than expected Chicago PMI number bodes well for today’s October ISM manufacturing number with a number of 56.5 expected, and is likely to act as a fairly positive indicator for Friday’s payrolls number.
The big question remains though given the continued recovery seen in the US economy, is how long it can continue to diverge from pretty much everywhere else in the world
, given that over 50% of the S&P500 company earnings come from overseas.
While the speculation remains as to the future timing of a US rate hike
, unless there is a turnaround in the economic data from Europe and China in the next few months, and a recovery in economic momentum, it’s going to be hard to imagine a scenario where the US would be able to raise rates without sending the US dollar even higher.
– we’ve seen further declines with a new low at 1.2440 and have seen a modest rebound with the 1.2450 area the last obstacle to a move towards 1.2000. Any rebound now needs to overcome the 1.2570 area to argue for a move back towards 1.2800.
– the pound continues to look weak, but for now remains well away from the lows this year at 1.5875. Only a break below 1.5875 potentially opens up a move towards 1.5720. We need to see a push back above 1.6070 to argue for a move back towards 1.6150 and last week’s high.
– having pushed below 0.7850 we look set for a further decline towards the September lows at 0.7760. A break below the 2012 lows at 0.7754 is the main obstacle to further declines towards 0.7690, the October 2008 lows. We need to get back through 0.7940 to stabilise.
– last week’s unexpected break above the 110.70 area has the potential to push the US dollar towards 115.00 in short order. We have initial resistance at 113.00 which could prompt a pullback, but only a break back below 110.00 would have the potential to derail a higher US dollar scenario.
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