2010 09 01

A rare positive economic data out of US is prompting a massive rally reversing last two weeks’ movements in stocks, commodities and bonds.

US manufacturing survey outcome indeed is a HUGE surprise given how poor all the regional Fed surveys have been. I am not sure if this would mark the beginning of upside surprises for US economic news – sentiment certainly seems like it has become extremely grim on US. I think it’s still too early for US rally compared to Europe at this point. Friday’s nonfarm payroll data is likely to be very poor.

We have seen a major rally like this before – so far this year there has been 5 days where SP500 rose more than 3%:

May 10, May 27, July 7, June 10 and today.

5/10/2010 1159.73 4.4%
5/27/2010 1103.06 3.3%
7/7/2010 1060.27 3.1%
6/10/2010 1086.84 3.0%
9/1/2010 1080.29 3.0%

SP500 was -8.2% in May and -5.4% in June. Only July was +7%. One day pop if anything foretells a poor overall month.

I still don’t see fundamental reason to re-embrace risk assets at this point.

Global manufacturing grows at a slower pace in August
• The Global Manufacturing PMI, compiled by JPMorgan with research and supply organisations, fell in August to 53.8 from 54.3 in June -- its lowest since November but marking its fifteenth month above the 50 mark that separates growth from contraction.
• The reason for slowing growth is declining new orders and waning boost from inventory restocking – both to be expected at this phase of economic recovery.

China PMI stabilizes in August
• China’a manufacturing gauge rose slightly in August ending 3 straight months of decline. Reading of 51.9 in Aug is better than the below 50 reading of July that shocked the world.
• Looking into detail, we see that domestic new orders are outpacing overseas orders perhaps signaling slowdown in global trade.
• It seems to me like China is managing to do a soft landing. Perhaps this signals the end of slipping economic data and perhaps additional government stimulus later this year. Not sure if that means I would necessarily be bullish A-shares but I think China is now likely to outperform rest of the year.

Eurozone manufacturing slowing but Germany and France still looking good while the others are in a bad shape
• The Markit Eurozone Manufacturing Purchasing Managers' Index for August dropped to 55.1 from 56.7 in July but was nudged up from an earlier flash estimate of 55.0 and marked its 11th month above the 50.0 mark that divides growth from contraction.
• Purchasing managers' surveys released earlier on Wednesday showed manufacturing growth in Germany, Europe's biggest economy, slowed in August whereas business in France accelerated. Italy and Spain saw their manufacturing indexes slip backwards, widening the gap among the euro zone's big four economies.

UK industrial recovery has now turned the corner for the worse.
• The drop in the composite PMI index from 56.9 to 54.3 is the third consecutive fall and leaves the index at its lowest level since November 2009. Most of the other main activity indices also softened, with new orders seeing a particularly sharp drop from 58.5 to 52.0, the lowest reading since June last year.
• Still far from a double dip territory but it’s looking like UK has also seen its economic peak in the past.

US manufacturing activity surprisingly good
• The Institute of Supply Management’s manufacturing figures showed an unexpected rise in US manufacturing activity in August.
• The index is a composite of surveys of more than 300 manufacturing firms on the direction of employment, production, new orders, supplier deliveries, and inventories, where readings above 50 suggest an expanding manufacturing sector, which in turn suggests economic growth.
• The headline numbers were mostly driven by gains in production and employment. The Production component increased from 57.0 in July to 59.9 in August. Employment jumped to 60.4 from 58.6 in the previous month. Despite these increases, the New Orders component, which is key to providing insight on sustainable economic growth since it is related to durables goods orders, fell by 0.4 to 53.1 in August.

US construction activities plummeting
• The U.S. Department of Commerce released a report that construction activity declined in July. Construction Spending fell by 1.0 percent in July after a revised prior period drop of 0.8 percent. The decline caught forecasters offguard as economists expected a decrease of just 0.5 percent. July’s print marks the third consecutive decline in construction spending after a peak of 2.3 percent in April 2010.
• This likely indicates further downward revision in GDP growth

ADP private payroll data in August is bad – but this indicator is notoriously volatile
• Automatic Data Processing revealed that the private sector cut 10,000 employees to payroll in August. The decrease follows the prior month reading which was revised downward by 5,000 to a final increase of 37,000 people. In addition, the August number surprised forecasts as economists were expecting an increase of only 15,000 people.