PMIs point to sluggish cycle

The Purchasing Managers' Indexes (PMIs), which are the single best barometer of the near term industrial cycle and general activity, were sluggish.  The continued fall in the US ISM index is probably the most important aspect of the data, suggesting growth has slowed after only a modest pick up earlier in the year.

While the headline US data were bad, the details were also concerning, with new orders and inventory data suggesting a stalling manufacturing sector.

This data is contrary to the strength in equity markets and certainly doesn't support the view of the need for tapering of QE from the Fed, which is currently being priced in to some degree in fixed income markets.  Markets didn't really react to the numbers at the end of the day, with payrolls looming at the end of the week to be a huge market mover.

The EU PMI data were less bad, with all countries contributing to the chunky rise in the headline regional number to 48.3, albeit still pointing to a contraction.  This is a welcome development for markets, but these data don't make a convincing case that the European struggle won't force a further need for much more significant policy intervention.

In contrast with the EU, Japan is actually embarking on an experiment of "whatever it takes" and the results from these data are encouraging.   The much weaker Yen is helping to lift Japanese activity and while it may to some degree be at the expense of other countries, I would argue that they are in a much better position to handle a stronger exchange rate than Japan is and thus Yen weakness is a very good thing.

The Chinese PMI data present the largest challenge for analysts.  The HSBC data was weak, but the official data were a bit more steady than expected.  Which one to believe is difficult, with the HSBC data probably having the better record in mirroring actual activity more closely.

The change to the sample size of the official PMI data may also have changed some of the observable seasonality in the data.  For example, when looking at the contribution to the monthly change in the PMI there has been some unusual trends in the last few months.

For example, New Orders, Production and Employment subcomponents, which account for 75% of the total headline index, are usually negative in May.  But this month these components were pretty flat.

Supplier inventories and materials were also very subdued in terms of contribution this month as well.

For commodities, while the headline number is good news, the fact that materials inventories aren't reportedly in general isn't particularly good news.  This is probably more reflective of an sector like steel, where inventories are currently too high, than of copper where destocking is happening.

China seems to be travelling along ok but probably still a bit weaker than expected despite recent downgrades to growth.  So overall, the data is not too inspiring for those looking for an upswing from the current grind.