MARKET MOVER - BNP PARIBAS - Investment Services India

Eurozone: Reality Bites
• The slowdown in the manufacturing sector
is gathering momentum, evident in both surveys
and ‘hard’ activity data recently.
• The latest PMI figures also showed weaker
service sector activity, supporting our forecast
of a marked slowdown in GDP growth.
When global economic growth is slowing, there is
often a period of uncertainty when, due to the lagged
impact of this slowdown, the eurozone seems to be
defying gravity – prompting speculation that it will be
largely unaffected by the global downturn. This is
usually followed by a reality check as the eurozone
economy belatedly starts to weaken. The latter now
seems to be occurring.
Manufacturing loses momentum
The eurozone 'flash' PMI figures for September came
in much weaker than was initially expected, with the
weakness broad based across sectors. The PMI for
manufacturing dropped from 55.1 to 53.6, the fourth
month in the past five to register a decline and the
lowest level for the index since January.
The sub-index of new orders fell from 55.3 to 52.8, its
weakest level for a year and a long way down on the
cycle peak of almost 60 in March this year. It is not
just the surveys which are faltering. The m/m fall in
industrial orders in July, of 2.4%, was the biggest
since early 2009 i.e. in the aftermath of the collapse
in activity post-Lehman. After a record-breaking 8%
q/q surge in industrial orders in Q2, Q3’s
performance will be much less impressive: an
unchanged level of orders in the next two months
would deliver a modest 0.5% q/q increase in Q3
overall.
The deterioration in the manufacturing PMI figures is
already indicative of a pronounced slowdown in the
y/y growth rate in actual orders (Chart 1) and the
breakdown of the manufacturing PMI suggests that
the weakness has further to go.
When the PMI figures are released, we always keep
a particularly close eye on the relationship between
the sub-indices for new orders and stocks of finished
goods. This can often be a good guide to the future
path for the ‘headline’ PMI in the sector. In the US
and UK, the differential between orders and stocks
had fallen sharply in the past few months, pointing to
a further deterioration in the ISM and CIPS surveys
for manufacturing in the period ahead.
Chart 1: Eurozone Orders & Manufacturing PMI
65
60
55
50
45
40
35
30
25
97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Manufacturing PMI:
New Orders (Lagged 2Mths)
Industrial Orders
(% y/y, Smoothed RHS)
Chart 2: Eurozone Manufacturing PMI Breakdown
1.4 Manufacturing PMI:
Ratio of New Orders to Stocks of Finished Goods
1.3
1.2
1.1
0.9
0.9
0.8
0.7
0.6
0.5
97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Manufacturing PMI: Headline (RHS)
Chart 3: Eurozone Composite PMI & Growth
65
60
55
50
45
40
35
30
25
Composite PMI:
Output
20
98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
GDP % (q/q, RHS)
The decline in the eurozone equivalent had, until the
latest month’s data, been much less pronounced. We
suspected that this was merely a result of lags and
the September PMI data support our view: the orders
to stocks ratio has fallen sharply, signalling further
downward pressure on the PMI (Chart 2).
15.0
5.0
-5.0
-15.0
-25.0
-35.0
60
55
50
45
40
35
30
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
Ken Wattret 23 September 2010
Market Mover
10
www.GlobalMarkets.bnpparibas.com