Gaining traction

by: Aline Schuiling , Maritza Cabezas , Joost Beaumont , Peter de Bruin

Global economy continues to accelerate as China rebounds,…

Data released yesterday were in line with our view that the global economy will accelerate in the remainder of the year. Indeed, China’s HSBC flash PMI rose to 51.2 in September from 50.1 the previous month, which was the highest reading in six months. The improvement was broad-based with gains in most of the sub-indices, including output, new orders and export orders. The report adds to evidence that China’s economy is picking up steam. Some of improvement in domestic demand has been supported by “mini stimulus” measures, which were implemented in the second quarter when the economy showed some signs of weakness. On the external front, although we expect export growth to moderate somewhat after strong reports in the past few months, the recovery of Western countries has been positive for China.

…and the Eurozone posts a gradual recovery…

Indeed, the flash estimate of the eurozone composite PMI rose from 51.5 in August to 52.1 in September. The outcome beat the consensus forecast of a rise to 51.7. The increase in the composite index was a combined result of a decline in the manufacturing output index (from 53.4 to 52.1) and a jump in the services sector activity index (from 50.7 to 52.1). The composite PMI tends to move closely in line with GDP growth and at its current level, it is consistent with GDP expanding at a rate of around 0.3% qoq moving into the final quarter of the year. This is in line with our scenario for the eurozone economy of an ongoing modest recovery. The details of the report show that employment in the services sector seems to be stabilizing (with the employment component rising from 48.5 to 50), while the pace of job losses in manufacturing is waning (employment component from 48.4 to 49.2). Finally, the PMI report suggested that the manufacturing sector should grow robustly in the coming months on the back of stronger world trade growth, with the new export orders index at 53.2 in September (a touch lower than August’s 53.6).

…though US Markit’s Flash PMI disappointed

Against this background, the unexpected drop in the US Markit Flash PMI from 53.1 to 52.8 in September came as a surprise. Indeed the data were not only difficult to square with last week’s Philadelphia Fed index, which rose to highest level since 2011, but also with the trend in global manufacturing production. Based on readings of yesterday’s Flash manufacturing PMI’s of China, the eurozone and the US, we estimate that the global manufacturing PMI edged up further in September, which would keep the series on an upward trend.

Draghi: ECB ready for new LTRO

Meanwhile, yesterday, it was ECB President Mario Draghi’s turn to grab the limelight. The ECB president, during his appearance before the EU Parliament’s Committee on Economic and Monetary Affairs, said that the ECB stands ready to announce another LTRO, if needed. Granted, Mr. Draghi actually reiterated what he already had said at the press conference following the Governing Council meeting earlier this month, but ECB Governing Council member Liikanen also indicated on Sunday that the ECB is ready to come with a new LTRO, suggesting that the central bank may be preparing markets for action. Indeed, the news led to a decline in short as well as long interest rates on German paper in what were otherwise lacklustre markets.