Morning comment: October flash PMIs

Chris Scicluna
Mantas Vanagas

Following a very poor session in Asia, equity markets opened on the back foot in the US and Europe yesterday. However, after being down as much as 2.4% in early trade, the S&P500 staged something of a comeback to close with a moderate loss of 0.6%, still however weighed down in particular by energy stocks (crude falling 4% after the Saudi energy ministers said OPEC was in “produce as much as you can” mode) and industrials (earnings outlooks from Caterpillar and 3M disappointing investors, with the former noting cost pressures exacerbated by US tariffs). As stocks rebounded, the 10-year Treasury yield rose to settle at around 3.17% from a session-low of 3.12% and $/¥ recovered after briefly falling below 112.

The improved price action initially continued in Asian today with key equity markets up early in the day, e.g. with China’s CSI300 posting a solid gain in the morning session. But much of that has since been given up and the index is currently up just 0.1%, while Hong Kong’s Hang Seng is now down about 0.2%. After recording heavy losses yesterday, South Korea’s KOSPI closed down 0.4%, but Japan’s TOPIX edged up 0.1%, helped by a slightly improved October manufacturing PMI report (more on this below) and the weaker yen. In the bond market, meanwhile, Treasury yields have nudged lower after President Trump again criticised the Fed for hiking rates, telling the WSJ that it was ‘too early to tell’ whether he regretted his nomination of Chair Jerome Powell – hardly a ringing endorsement! But having sold off yesterday after the Italian Government signalled that it was in no mood to change direction on fiscal policy despite the Commission’s request for revisions to the draft budget, BTPs have opened a little higher this morning.

In another quiet day for Japanese data some unexpectedly positive news was provided by the flash manufacturing PMI for October. The headline business conditions index rose 0.6pts to 53.1, marking the strongest reading since April. Within the detail the output index rose 1.1pts to 53.0 and the employment index rose 1.6pts to 53.4, perhaps reflecting some catch-up following recent storm and quake-related disruptions. The new orders index rose a comparatively modest 0.2pts to 52.7 but the new export orders index rose 1.8pts to a 7-month high of 51.7. Elsewhere in the survey the pricing indices were especially strong this month, with the input prices index rising 2.6pts to 62.8 and the output prices index rising 2.3pts to 55.0 – the latter a level last reached in October 2008. Needless to say it is possible that there could be downward revisions to these preliminary readings when the final report is released next week, especially in light of recent weakness in equity markets.

Euro area:
Like in Japan, today’s euro area data focus will be the flash October PMIs. The euro area composite PMI has fallen significantly since hitting a multi-year high of 58.8 at the start of the year, and has been stuck firmly below 55 since May. This month’s reading seems likely to come in close to September’s level of 54.1. The equivalent PMI indices from Germany and France are expected to be little changed too. However, the INSEE French business sentiment survey already released this year was a disappointment. While services and construction were stable, there was renewed weakness in retail and manufacturing, the latter of which indices fell to a near-two-year low. As a result, the overall business climate index fell a point to 104, still however above the long-run average. Beyond the nosiness surveys, euro area bank lending data for September are also due today.

After yesterday’s CBI industrial trends survey reported a deterioration in business optimism in the manufacturing sector in October at the steepest pace since the referendum, with the lowest reading in two years for order books and confidence about export prospects at the lowest since the height of the euro area crisis, Theresa May’s cabinet discussed contingency plans to ship in emergency supplies of food and medicine in the event of a ‘no-deal’ Brexit. The PM will no doubt hope that such a sobering prospect will provide food for thought among her party’s Brexiter backbenchers, and help to ward off outright rebellion, when she addresses them on progress in the Brexit negotiations later today.  

More prosaically, the UK Finance lending figures from the major retail banks will be the only economic data release of note today. Figures from this industry group suggested that the number of new first-time buyer mortgages completed in August was the highest since June 2017. However, today’s data are expected to show that the total number of mortgage approvals eased slightly in the latest month.

In the US, the Beige Book will provide updated evidence on economic activity from the regional Fed offices, while today’s other notable economic data releases – the FHFA Home Price index and new Home Sales – will focus on the residential property market. Meanwhile, Cleveland Fed President Loretta Mester, an FOMC voting member this year, will speak publicly.  

Today saw the first ever release of flash Markit PMI readings in Australia. Unfortunately the news was not good, with the CBA-sponsored composite index declining 1.3pts to 51.2 – the lowest reading in the short (2½ year) history of the series. Perhaps a little surprisingly, the weakness was concentrated in the services sector where the headline PMI fell 1.4pts to 50.8. By contrast the headline manufacturing PMI rose 0.3pts to a 4-month high of 54.3. Given the short history of these series it is unclear what weight should be given to these findings compared with the long-established NAB Business Survey, with the latter continuing to record well above-average business conditions in recent months.

In other news, the Department of Employment internet job vacancies index fell 0.6%M/M in September. This marked the sixth consecutive decline, reducing annual growth to 1.6%Y/Y.


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