Global Macro: PMIs hint at stabilisation, but still early days – With global markets still nervous about the extent of the industrial sector slowdown, the upside surprises in China PMIs over the weekend (see below), and the US ISM manufacturing PMI today (which rose to 55.3 from 54.2, led by new orders), have provided some modest support for risk appetite. The signs of recovery in the US in China come in contrast to the eurozone, where flash PMIs indicated a continued recession in the manufacturing sector, and this weakness is likely to be confirmed by the final estimates released this coming Wednesday. Indeed, we continue to think the risks in Europe are tilted to the downside. Even for China and the US, it is early days, and we cannot read too much into a single month’s data.
For China, we have previously pointed to some green shoots, such as the pick-up of state-led investment and overall credit growth following the policy shift from targeted tightening / financial deleveraging to targeted, piecemeal fiscal and monetary easing. The Purchasing Managers’ Indices (PMIs) for March published over the past few days provide further signs of stabilisation and came in better than expected. On Sunday, the ‘official’ manufacturing, services and composite PMIs (that focus on the larger and state-owned companies) all rose to the highest levels since September 2018, with the manufacturing PMI climbing back to above the neutral 50 mark. On Monday, Caixin’s manufacturing PMI for March was published (services/composite PMIs are due on Wednesday). Caixin’s index (with a stronger focus on smaller, export oriented firms) rose by almost a full point, coming in at 50.8 (February: 49.9), beating expectations as well (consensus: 50.0). This followed an already sharp uptick in February. The improvements in this index was quite broad-based.
Remarkably, Caixin’s employment sub-index surged to a six-year high. This should ease some of the concerns about the Chinese labour market, after the unemployment rate in urban areas had reached a one-year high in February. Meanwhile, the improvement of PMI export and import components of both the official and Caixin PMIs suggest that annual growth of exports and imports – which weakened sharply over the past months – is bottoming out, although we still expect lower annual growth of Chinese goods trade this year compared to the levels seen in 2017 and 2018. For more background, see our Short Insight report published earlier today. (Arjen van Dijkhuizen & Bill Diviney)
UK Politics: Referendum could see majority support tonight – Following the third failure by PM May to get her deal passed last Friday, parliament will again vote on a range of Brexit plan B options this evening (voting at around 21:00 CET). In the last round, the most popular alternatives were a customs union and a second referendum, and it is possible these could garner further support – perhaps even a majority – when the vote takes place this evening. However, there is nothing to compel the government to adopt a policy supported by parliament, and PM May has indicated that the government could not support something that goes against manifesto commitments. The government would be unlikely, therefore, to support a customs union, or the Norway model, which could also get a majority tonight following Labour/SNP’s declaration of support for it. But with PM May still seemingly desperate to get her deal through parliament, she could yet – despite her outspoken opposition to it – accept a referendum as a concession to get the deal over the line. Indeed, one Conservative Party MP who is in favour of May’s deal wrote a letter to colleagues today urging them to support a referendum.
Failing this, we believe the most likely next step is that PM May moves to trigger a general election, despite seemingly little appetite for this among Conservatives given the potential for it to split the party. Either scenario – a referendum or a general election – would be a benign one for financial markets, leading to PM May requesting a long Brexit delay from the European Council, and therefore removing the risk of a near-term disorderly Brexit. (Bill Diviney)