Weakness in Latest PMI Read - Ahead of Wall Street

Tuesday, March 24, 2015

A benign inflation reading on the home front and a batch of conflicting data out of Europe and China provide the backdrop for today’s trading action. It appears that market participants see the favorable data out of China as offsetting the weak Chinese reading — at this stage, at least.

The HSBC Bank’s preliminary or flash manufacturing sector PMI for March came in lower than expected at 49.2 vs. the 50.7 final reading for February. This is an 11-month low for this keenly watched measure, which was last below the ‘50’ level in January when the index fell to 49.7. The weakness in this PMI reading is particularly notable as this survey is weighted towards small and medium-sized businesses that are mostly in the private sector versus the mostly state-owned large enterprises that get tracked in the official PMI survey.

While China’s economic readings are hard to interpret for a variety of reasons, the issue becomes particularly problematic around the Lunar New Year, which tends to distort readings for January and February. The significance of today’s HSBC PMI reading is that it is not distorted by any such issues, likely indicating that the fourth quarter softness has carried into the current period as well. This is prompting a number of forecasters to bring down their estimates of GDP growth in the first quarter to under 7%; China’s GDP grew at a +7.3% pace in Q4.

Unlike China, the PMI data out of Europe is showing plenty of positive momentum, with Markit’s March PMI for Germany coming in better than expected at 54.1 vs. February’s 53.3. The New Orders strength in today’s survey shows that the March momentum could be sustained in the coming months as well.

Germany was best performer within the Euro-Zone in Q4, and the same trend appears to be in place in the current period. This is a very encouraging report as it not only indicates that the Greek drama hasn’t been enough to derail the recovery, but that the deflationary pressures seem to be easing as well.

In corporate news, Chesapeake Energy (CHK) announced cuts to its capital expenditure program, citing weak commodity prices. Other major industry players like Chevron (CVX) and ConocoPhillips (COP) have already announced capex cuts in response to the low oil prices. Chesapeake now plans to spend $3.5 to $4 billion in capital expenditures this year, below the prior $4 billion to $4.5 billion estimate earlier.

Sheraz Mian
Director of Research

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