NEW$ & VIEW$ (3 April 2012)


Deutsche Bank’s Jim Reid and Stephen Stakhiv took to some regression analysis and plotted the ISM against the S&P 500, to see what the indices potentially have to say about each other:

From the strategists:

If we reload our monthly ISM regression analysis to gauge potential S&P 500 levels, yesterday’s print of 53.4 corresponds to a YoY increase of 10.1%. Given that the S&P at the beginning of April 2011 was 1332, this would assume a ‘fair-value’ level of about 1465, against last night’s close of 1419. (Via FT Alphaville)


Confused smile   Markit attempts to explain discrepancies between two PMI surveys:

imageThe two surveys released over the weekend provided a sharply divergent assessment of the health of China’s manufacturing industry in March. The Markit-compiled manufacturing PMI showed the sector slipping further into contraction – confirming the survey’s earlier ‘flash’ estimate published on March 22. In contrast, the NBS/CFLP survey pointed to the strongest improvement in operating conditions for a year.

Markit adjusts PMI data for seasonal trends using an in-house method developed specifically for its business surveys, which we now run in 32 countries as well as China. Markit’s seasonally adjusted data contain no residual seasonality. However, some seasonality appears to remain in the CFLP data, as shown in the below chart, with an upward bias especially evident for the month of March, which is likely the main reason why the surveys sent conflicting signals.

image image

The Chinese New Year effect:

imageRemoving the seasonal impact of Chinese New Year on the NBS data for March therefore suggests that the underlying growth of China’s manufacturing sector remains weaker than the published data suggest. The findings also indicate that the April reading from the NBS/CFLP will likely be supported by seasonal trends to a greater extent than the Markit-produced index.

High five   However, even after adjusting (again) for seasonality, the CFLP series still signals a stronger performance than the Markit-produced PMI. What may be causing this?

Like all other Markit-produced PMIs, the HSBC survey panel (on which the flash release is also based) is carefully selected according to industry sector and company size using the latest available manufacturing valued added statistics. A weighting system is also used which further ensures that survey responses have an appropriate impact on the results according to the relative importance of the sector they operate in and the size of the company. The panel is also carefully selected to ensure representativeness across regions and state-owned and private companies.

In contrast, the CFLP/NBS survey panel is commonly reported to be skewed in favour of larger firms and – as far as we are aware – no weighting system is used. With the CFLP index for large enterprises rising 3.4 points to 54.4 in March, and the equivalent measure of small enterprises falling by 4.3 points to 50.9, the stronger CFLP measure relative to the Markit PMI may simply reflect this bias towards better-performing larger firms.

Storm cloud   ISI concurs with my view that China displayed more weakness in March.

When we combine and seasonally adjust these different surveys, we see a weak March. We get a PMI at 49.8 (below the 50/50 line); we get a 2.7% m/m decline; and we get a 3.5% y/y decline. Orders, production and employment (75% of the index) all fell.

China First-Quarter Growth at 8.4% According to Estimate Cited by Official

China’s economy may have expanded about 8.4 percent in the first quarter, the least since the first half of 2009, according to an estimate given by an official 10 days before the data are due.

Australia Leaves Benchmark Rate at 4.25% as Growth Slows; Currency Falls

Australia’s central bank signaled today it may resume cutting interest rates as soon as next month if weaker-than-forecast growth slows inflation, sending the local currency and bond yields lower.

Pointing up   China is Australia’s biggest trading partner.


China may not be hard landing but it is still weakening along with its major trading partner, Europe. The U.S. is not double dipping but growth remains slow and rests ion large part on its fragile consumer.

Sad smile   On March 23, Fedex said that it was scaling back its forecasts for global economic growth from 2.9% to 2.3%, a pretty meaningful decline, especially since the outlook for the U.S. was only shaved from 2.2% to 2.1%. Bloomberg’s Rick Yamarone illustrates why we should respect Fedex views.





Warm temperatures didn’t seem to give much of a lift to construction spending. During February, outlays fell 1.1% (+5.8% y/y) following a downwardly revised 0.8% January drop.


Sad smile   Small business lending barely grew in February

The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, edged up to 98.3 in February from 98.2 a month earlier, PayNet said on Tuesday.

Borrowing rose 14 percent from a year earlier, the lowest 12-month growth rate since September.

The December and January readings for PayNet’s lending index were both revised downward.

PayNet tracks borrowing by millions of small U.S. businesses, and the index is correlated with changes in U.S. gross domestic product a quarter or two in the future.



Crying face   Spain Jobless Claims Rise

Spain continued to shed jobs in March, albeit at a slower pace than February’s decline, providing new evidence that the economy’s turn toward contraction is weighing on the labor market.

March jobless claims rose 38,769, or 0.82%, from February, while they increased 9.63% over the same period a year earlier. The total registered jobless were a little more than 4.75 million. In February, jobless claims increased 2.44%.

Crying face   Italy’s Jobless Rate Increases to Highest Since 2001

Unemployment increased to 9.3 percent in February, the highest since the first quarter of 2001, from a revised 9.1 percent in January.

Recession stirs doubts over Italy’s targets
Outlook offers potential to hamper budget cut plans

“Italy’s efforts to meet the headline budgetary targets may be hampered by the depressed growth outlook and relatively high interest rates. The government should stand ready to avoid any slippage in budgetary execution and take further action if needed.”

Lightning   Spectre of 1930s haunts Europe’s periphery
Some economists see EU spring turning wintry

“The key point is that if the private sector is deleveraging, the last thing you want is for the government to cut its budget deficit,” he says. “If central banks bring interest rates down to almost zero and nothing happens then it is not an ordinary world.”

(…) the eurozone’s fiscal compact, which enforces synchronised austerity even for its healthier members, risks repeating Japan’s mistakes of 15 years ago. And he rejects the idea that increased public borrowing would necessarily scare the markets: Japan, the US and the UK are running looser fiscal policies while still enjoying low rates of borrowing.

Some European officials at the Ambrosetti forum appeared to be scarcely able to conceal their scorn when listening to Mr Koo’s presentation. They argue it is delusional to believe one can choose between austerity and growth. Austerity, they say, is an indispensable precondition for the return of market confidence and economic growth.


Headlines (Euro Inflation May Be Easing) point to a slowdown in YoY gains in producer prices. PPI ex-construction rose 3.6% YoY in February and is only +1.7% YoY ex-energy. But that was because core PPI declined 0.3% between September and December 2011.

Monthly prices have actually been reaccelerating in the past 2 months with total PPI rising at a 8.4% annual rate and core PPI at a 4.2% annual rate. (Eurostat)



Rainbow   U.K. Sees Construction Boost

The U.K.’s construction sector expanded at the fastest pace since June 2010 in March, lifted by a four-and-a-half year high increase in new orders.

The unseasonably good weather in recent weeks has allowed building projects move ahead quickly. It is also likely that firms’ ability to press ahead with building works has freed up some investment funds for new projects.


Rainbow   Sales Market Stable For Manhattan Units

Manhattan apartment sales remained stable during the first quarter, amid signs, brokers said, that the recovery in this affluent housing market was continuing.

Market reports being released on Tuesday show strong sales among Manhattan’s most expensive apartments and new developments and a pickup in sales of smaller studios and one-bedroom apartments that long have been lagging.(…)

Jonathan Miller, an appraiser and president of Miller Samuel Inc. who prepared the Elliman report, attributed the flat overall prices to an uptick in sales of smaller, lower-priced apartments in the past two quarters.

Pam Liebman, president of Corcoran Group, said low-end sales were driven by a Manhattan vacancy rate of less than 1%.(…)

Brokers also say foreign buyers are more active now than they were during the peak of the market a few years ago. In addition, inventory of available apartments has been falling, the reports found.(…)


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