- World manufacturing robust in August, despite the Ukraine crisis…
- …led by the US, where business investment is supporting growth
- The dollar continues to gain momentum and we see further upside
Global manufacturing is turning up
The global manufacturing PMI rose to 52.6 in August from 52.4 in July, taking it back to the level seen in June. Noticeable among the underlying indices was a pickup in export orders, which are a reasonable tracker of world trade growth. They rose to the highest level since November of last year. Apart from that month, it was the highest level since March 2011. The country breakdown revealed differences between economies. The rise in the global manufacturing index was driven by the US (see below) where both the ISM and Markit’s PMI suggest the sector is approaching boom growth rates. The PMI also rose in Japan and Brazil. Japan’s economy was hit badly earlier in the year by the sales tax hike and there are signs that it is slowly getting back on its feet. On the other hand, the manufacturing PMI fell in China, though it remains at decent levels, as well as the eurozone and the UK. Overall, the reports suggest that the global economy is so far shrugging off the Ukraine crisis, though there may have been some impact on confidence in Europe. We think such effects will likely prove limited and short lived as long as the crisis does not severely escalate. Growth in manufacturing output and world trade is likely to continue to firm. Strong US demand should act as a catalyst for trade and production in other countries. In addition, further monetary stimulus is on the way in the eurozone and Japan, while the Chinese authorities will continue to take targeted measures to keep growth in line with their targets.
US ISM manufacturing index highest since 2011
The ISM manufacturing index rose to 59 in August up from 57.1 the previous month. The index has been steadily increasing since January. The durable goods report released last week indicated that gains in business investment are an important driver of the strength in the sector. The composition of the report was favourable, with the more forward looking new-orders sub-index surging to 66.7 from 63.4 the month before. This was the highest since 2004. This suggests we will continue to see gains in manufacturing activity. Meanwhile, the employment sub-index remains strong, but edged down to 58.1 from 58.2. Most evidence is pointing to an upbeat payrolls report this Friday. Overall, the data supports our view that the economy is picking up strongly and that it will continue on this path going forward.
The dollar rally is looking increasingly convincing
Since the end of June, the US dollar has appreciated by around 4% (see graph) driven by stronger than expected economic data releases. Financial markets have modestly adjusted their view on the Fed’s path of rate hikes for 2015. This was driven by an improving economic outlook and less-dovish commentary from Fed officials. There have been two important catalysts in this respect: the last FOMC meeting minutes and Fed Chair Yellen’s more neutral language at Jackson Hole, while previously she had signalled the merit of keeping monetary policy accommodative for a long period. As a result, the market is gaining confidence that her stance is also slowly changing. Going forward, we expect financial markets to further build expectations that the Fed will hike rates a number of times in 2015. It is likely that this will start to play out in the fourth quarter of this year. Higher US interest rate expectations, strong US economic growth and constructive investor sentiment will provide a positive cyclical swing to the US dollar. A major divergence is coming into place between the monetary policy of the Fed, on the one hand, and that of the ECB and BoJ on the other, which will ease monetary policy further. Yesterday the dollar’s strength was also evident versus precious metal prices that lost between 1-2.5%. Going forward a combination of higher US interest rates, a stronger US dollar and positive investor sentiment will likely be a heavy drag on precious metal prices.