Global PMI data a reminder of harsh economic realities

Sentiment drive by fears about global growth

Market sentiment was derailed overnight by fresh anxiety about a global economic growth slow-down. Stocks struggled, while other growth tied assets underperformed. The catalysts were a series of Purchasing-Managers-Index numbers released out of the US and Europe, which generally pointed to a softening outlook for the global economy. The data didn’t prompt anything like the kind of panicked-selling and volatility that’s defined market behaviour in the past few weeks. But it was a fresh reminder of the cold-hard fundamentals investors are having to contend with right now; and at that, the high-stakes game policymakers face in trying to reboot the global economy.

Europe’s were poor, but US PMI data the shocker

The European PMI numbers were perhaps given greater focus leading into last night’s trade. But it was likely the disappointing US PMI figures that ultimately stole the limelight. It must be stated: the European data were very poor, with German Manufacturing numbers printing a paltry 43.6 and the Europe-wide numbers printing at 47.0. However, they were actually slightly better than expectations – and ultimately proved more a reminder than a revelation about the soft state of the European economy. The US numbers were a bit of a shock though. US Manufacturing PMI slipped to a “contractionary” 49.9 figure, portending a coming slowdown in US economic activity.

Markets avoid “growth” and “risk”

So it was that handful of dour news that kept risk-taking contained last night, and saw growth tied commodities and currencies slip. The AUD was exhibit A, dropping towards the 0.6750 level. The Kiwi also remains mired into the 0.6300 handle. The Japanese Yen continued to grind higher, while the USD is maintaining its upward trend. Oil prices pulled back on the concerns for global industrial activity. And in stock-markets, the S&P 500 closed practically flat, the DAX shed half-a-per-cent, and the FTSE100 gave up over 1%, setting up a 9 point drop for the ASX 200 at this morning’s open, according to SPI Futures.

Bonds trade out of step with other asset classes

The conspicuous difference in overnight trade, compared to that which has generally been seen in the last few weeks, is that bond-yields actually lifted, despite the poor economic data. Investors are becoming less assured policy-makers will come-to-the-table as aggressively as previously thought with monetary policy stimulus. This perception has been shaped in the past few days by a series of Fed-speakers, as well as FOMC and ECB meeting minutes, which failed to categorically affirm that (effectively) emergency monetary stimulus is on its way. This disconnect between policymakers and market-participants is heightening fear in the market, and opens a void that could soon be filled by renewed volatility.

Markets to moving ahead of policymakers

One can see why central bankers might be wanting to keep their powder dry: price-action in the market right now suggests that investors are betting on nothing less than aggressive rate cuts and a new era of quantitative easing in the global economy. For example: roughly 4 interest rate cuts from the US Fed in the next 12 months is practically factored in to financial markets. There is two more cuts priced in from the RBA in the next six, too. The market is effectively ahead of policymakers in setting monetary policy across the world, with the presumption that central-bankers will have little choice but to rubber-stamp this view, in time.

Central bankers’ invidious position

Such is the pitfall of “forward guidance” as a policy tool, that rate cuts can lose their efficacy by the time they actually occur. It makes for a precarious situation, and could explain why central bankers aren’t rushing to soothe the market with more dovish rhetoric, at-the-moment. If things in the global economy do get worse, they want the maximum energy available to jump-start its heart. It’s this underlying tension that makes this weekend’s Jackson Hole meeting the week’s key event. How can Fed Chair Jerome Powell simultaneously assuage investors worst fears about the economic outlook, while ensuring that he doesn’t render future Fed policy practically impotent?

Positive Brexit news

As a slight aside, and touching on a story that deviated from the broad macro-narrative last night: the Pound popped higher on news that European leaders – most pertinently German Chancellor Angela Merkel – see scope to negotiate Brexit before the October 31 deadline. The news amounted to little more than just words, and solves few, if none, of the problems between the UK and Europe. Irrespective, the change in language was clearly welcomed by traders. The Cable rallied into the 1.22 handle for the first time in a month, as hope springs that just maybe a hard Brexit can be avoided.