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September 1st 2011:  Preview  -  PMI releases to set September tone

 

After the severe market turbulence of August, the PMI data due for release on Thursday will be very important in setting September’s tone as markets look to assess the danger of a much more severe economic downturn.  The US and UK will release their August data while the Euro-zone will release an update to the flash data.

A further sharp decline in the indices would increase recession fears and also trigger a renewed meltdown on Wall Street as risk appetite would be crushed. The danger zone is likely to be in the 47 area as any figures below this level would certainly increase fear substantially. In contrast, any data above 49.5 would lead to an important sense of relief. The more likely outcome is limited relief given the level of expectation. Caution should give the dollar a firm tone ahead of the release as players are likely to anticipate a very poor outcome while Sterling is likely to weaken in the run-up to the UK data.

One positive aspect is that markets are braced for poor data which should dampen the impact. Last month, the consensus estimate for the US PMI index was at 55.0 so the actual figure of 50.9 came as an important and severe shock.  This time, markets are expecting a further deterioration to around 49.0 which would be the first sub-50 reading for two years.

The timing of the data could trigger additional short-term market volatility as liquidity conditions will be relatively thin during the holiday season with US markets not engaged in full-blooded trading until after Monday’s labour day holiday.  Regardless of short-term fluctuations, the data will certainly be very important in determining whether markets can restore some degree of confidence or whether there will be a further lurch towards recession and financial-sector crisis.

Two US releases in particular had a serious negative impact in destabilising markets from late July and the PMI release was certainly one of these as it declined sharply to 50.9 from 55.3 previously. Markets will, therefore, be on high alert this time and will be looking for reassurance that the economy is not deteriorating at an extremely rapid rate. The regional surveys since then have not offered much support with a particularly sharp decline in the Philadelphia Fed survey which fell to -30.7 from 3.2 in July. If the Philadelphia Fed is representative of the national picture then there will be the risk of a slide to below 40 for the national index which would trigger panic, but this is not a likely outcome.

The UK PMI manufacturing data was also particularly weak last month with a decline to 49.1 from  51.3, the first contraction since October 2009. The evidence since than has been mixed as the international news has been generally gloomy which will have had an impact on the UK. The latest CBI manufacturing survey was, however, more upbeat with orders moving to positive territory.

It is certainly the case that manufacturing will be important for the UK economy as there is little chance of consumer spending making any positive contribution in the short term.  If the UK manufacturing sector also slumps, then the economic trajectory is likely to be bleak.

The immediate policy implications should be limited as the Bank of England has already indicated that interest rates will be staying at rock-bottom levels for the next year at least. A very weak figure would have an impact on the quantitative easing debate, but the bank is likely to wait for further evidence before making any decision. Sterling has already surrendered transitory gains when the currency was perceived as a safe haven and heavy selling pressure should be resisted unless there is a figure below 47.5.

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