Euro Macro: Italian economy set for stagnation – Data released today showed that the soft manufacturing PMI for Italy published earlier in the week was followed by a significant slowdown in the services sector. Italy’s services PMI fell to 52.6 in August from 54 in July. This left the composite PMI (covering the whole economy) at 51.7 in August from 53 the previous month. This is a good indicator for quarterly GDP growth. It suggests that quarterly economic growth slowed to zero in Q3, from 0.2% qoq in Q2 and 0.3% in Q1. So the Italian economy appears to be stagnating again after the relatively strong growth seen in 2017 and the start of 2018. Markit – which produces the survey – reported that business confidence was ‘undermined by geo-political trade frictions, concerns over future government policies and difficulties in accessing credit for investment’. Recent trends suggest that the government will need to slash its economic growth forecasts in the current budget, which will add to the upward pressures on the budget deficit from the financing of the coalition’s policy priorities. The government is forecasting GDP growth of 1.5% this year and 1.4% in 2019. Economic growth is likely to be more than half a percent lower in each year on unchanged policies. (Nick Kounis)
US Macro: The ISM is still a better predictor of GDP growth than the Markit PMI – The ISM manufacturing PMI rose to a 14-year high of 61.3 in August, helping to push 10y Treasury yields briefly back above 2.90% yesterday. The reading was well above consensus forecasts for a decline, and in notable contrast to the Markit manufacturing PMI, which fell to a 9 month low of 54.7. Which of the two offers the better read on the US growth outlook? The Markit PMI has a shorter history, and the data in our possession only extends to the past three years. However, over that three year period, the ISM has been a much better predictor of US growth outcomes than the Markit PMI; the correlation both for the headline index and for new orders with quarterly GDP growth is 0.7 for the ISM, but just 0.4 for the Markit PMI. Yesterday’s reading helped push the Atlanta Fed’s GDPNow tracking estimate for Q3 up to 4.7% qoq annualised, up from 4.1% last week. That tracking estimate is likely to come down again as more data comes in; our forecast for Q3 is a more modest 3.6% annualised. However, it is a good sign that the strong growth momentum of Q2 is likely to extend into Q3.
Moreover, the ISM new orders index specifically is a very strong leading indicator for investment in the US, with the highest correlation (0.9) at a 2 quarter lag (i.e. the current new orders index is a strong indicator for growth two quarters ahead). With the new orders index also not far off the highest since 2004, at 65.1 as of August, the exceptional strength at present looks like it could even extend into early 2019. (Bill Diviney)