Focusing on the Economy
For what has seemed like an eternity, traders have maintained a singular focus. First it was the economy, then it was Japan, then Greece, then Italy/Spain, and now the 4-D’s in Washington (i.e. debt, deficit, default, and downgrade). But if I’m not mistaken, it looks as if the focus may be shifting again. And why not, the budget deal looks to be a sure thing (heck, they’ve still got 19 hours left to get the thing voted in) so what else are the A.D.D. children of Wall Street to do? That’s right, move on to the next thing.
I’m not talking about the results from the latest earnings parade. With two-thirds of the S&P 500 having already reported, the fact that something like 78% of the companies beat EPS estimates is old news by now. Nope, I’m talking about an oldie-but-a-goodie, the dominating force for those taking a macro view – the state of the U.S. economy.
Up until just recently (Friday to be exact), the general consensus was that the economy had hit a soft patch or a mere bump in the road to greener pastures. However, after the GDP report showed that the economy came dangerously close to dipping back into the red zone in the first quarter and then wasn’t exactly hitting on all cylinders in the second quarter (most analysts are looking for a downward revision to Q2′s already anemic +1.3% annualized growth rate), there are new terms cropping up such as “hard patch” and the old standby’s such as “double-dip” and “the R-word.”
I fully recognize that one report does not a debacle make. So, despite my membership in the glass-is-nearly-full club, which, by the way, demands that I put my faith in the Fed’s prognostication that things will pick up meaningfully in the second half of the year (hey, isn’t that’s now?), imagine my surprise when the ISM reports from around the globe stunk up the joint Monday morning.
Let’s take a quick look around from the point of view of the world’s purchasing managers. But before we start, remember that in the PMI/ISM reports, readings over 50 indicate expansion while readings below indicate a contraction in manufacturing. Let’s start with the league-leading economy of China. On Sunday, the Chinese reported a PMI of 50.7, which while still above 50 for like the 29th consecutive month, is getting pretty darn close to the line. And if you look at the recent readings, the trend becomes fairly clear. June: 50.9, May: 52.0, April: 53.4… See what I mean?
Let’s now look at the Manufacturing PMI’s across the pond. The Eurozone came in with a reading of 50.4 (June: 52.0, May: 54.6, April: 58.0, March: 57.7). Germany, which is arguably the strongest economy in Europe, reported a PMI of 52.0 versus June’s 54.6 (May: 57.7, April: 62.0, March: 60.9). And since I did my best to stimulate the economy when I visited recently, I was surprised to see France in similar shape with a reading of 50.4 compared to 52.5 in June, 54.9 in May, and 57.5 in April. And finally, there are the Brits, who are all over the austerity kick these days. But unfortunately, the UK PMI raised a red flag with a reading of 49.1, which was also down a fair amount from June’s 51.3.
Closer to home, the ISM Manufacturing Index came in at 50.9, which was a big miss when compared to the consensus expectations of 54.0 and June’s reading of 55.3. Looking deeper into the report, it was tough to find any good news as the Employment Index fell to 53.5 from last month’s 69.9 and the New Orders component fell to 49.2 from 51.6. Ouch.
My point this morning is that the PMI/ISM numbers are closely watched amongst traders and this month’s data, like the GDP report, bordered on ugly. So, if traders have indeed shifted their focus away from Washington and onto the economy, they may not like what they see (unless the numbers perk up into Friday’s jobs report). Thus, if we start to see rallies being being sold into (such as we saw on Monday), it could be a sign that there might be some de-risking happening due to the macroeconomic view.
Oh, and speaking of shifting focus, don’t look now fans, but the European Debt Crisis doesn’t seem to want to go away. This is definitely something to keep on your radar.
Turning to this morning… Stock futures are pointing down again this morning in response to Italian spreads continuing to widen. Markets appear worried that it is only a matter of time before Italy needs a bailout. And remember, Italy is not Greece in terms of the size of its economy.
On the Economic front… Personal Incomes rose by +0.1% in June, which was in line with the consensus expectations for an increase of +0.1%. The May level was revised lower to +0.2% from +0.3%. Personal Spending (now called “Consumption”) for the month fell by -0.2%, which was three tenths below the expectations of +0.1% and also below the May revised reading of +0.1%. Finally, the Core PCE (think inflation) came in up +0.1%, which was below expectations for +0.2% and May’s +0.3%.
David Moenning
Editor: The Daily Decision
