Markets in the US are closed today for the Labor Day holiday, but the crowd will have plenty of new data points to digest on Monday with several updates to purchasing managers indexes throughout Europe, including the final August reports for Germany and France. The main event, however, will be the revision for the EU manufacturing survey. Later, the August release on UK manufacturing PMI arrives. Meantime, keep an eye on USDJPY as the market focuses on Wednesday’s Bank of Japan announcement.
EU Manufacturing Purchasing Managers Index (07:58 GMT) With the U.S. markets closed today, the subject of recession in the Eurozone will come into sharper focus amid a series of updates for August purchasing managers indexes (PMI). For the moment, a wary optimism prevails, in part because the PMI for Europe overall continues to trend higher. In the flash estimate for last month’s reading, this benchmark for manufacturing posted its second consecutive reading above the neutral 50 mark, signaling an end to a year-and-a-half run of contraction. According to the initial estimate of the Eurozone Manufacturing PMI, the sector posted its “fastest growth of output since May 2011,” with similarly upbeat news for services, according to Markit Economics (pdf).
Today’s final read on the manufacturing number for last month isn’t likely to see a major revision, up or down, but the market will nonetheless pay close attention to the release. There’s still a fair amount of scepticism for thinking that Europe’s macro trend has turned the corner in a meaningful way, especially in terms of activity beyond Germany. Indeed, the PMI numbers in both manufacturing and services for France slipped a bit in the flash August estimates, remaining just below the neutral 50 (pdf). Meanwhile, Eurostat on Friday advised that employment in Europe remained stuck at record levels in July(pdf). In other words, Europe’s recovery, at best, remains precarious. "The recent improvements are minimal and the situation is still very fragile,” the EU employment commissioner said last week. “This is no time for celebration or complacency."
All of which leaves little room for downside surprises. Today’s update on the broad trend for the Eurozone isn’t likely to change much relative to the flash estimate. But with expectations still vulnerable, this number will be on the short list of closely watched data points for Monday.
UK Manufacturing Purchasing Managers Index (08:28 GMT) Today’s update offers an early look at Britain’s macro profile for August. Recent data sends a clear signal that the economy is growing at a solid pace. The recent recession, in sum, is history. The encouraging trend in the UK, by the way, also looks quite a bit stronger compared with early evidence for optimism on Europe’s business cycle.
The services and manufacturing sectors in Britain have posted impressive rebounds in recent months, according to PMI survey data. There’s also credible signs of recovery in the hard numbers, including a higher pace of growth in retail spending, a substantial rise in housing prices, and a persistent fall in the number of workers claiming jobless benefits this year. No wonder that Britain’s stock market has trended higher—the FTSE 100 is up nearly 9 percent in 2013 through August 31. Overall, it’s safe to say that the positive momentum in the UK economy is strong and broad enough to anticipate that growth will prevail for the near term. Today’s release will probably reconfirm this increasingly obvious message, and in the process lay the groundwork for expecting that the August numbers will fall in line with the recent trend as the macro updates arrive in the week ahead.
USDJPY Correlations come and go in the financial markets, but it’s still hard to ignore the tight connection this year between Japan’s stock market and the yen, as defined by USDJPY. The relationship isn’t written in stone, although there’s no mystery as to what’s been driving the positive correlation in 2012. So-called Abenomics is the engine, which is focused on devaluing the currency as one of several tools to shake Japan out of its deflationary slump and promote growth. The strategy seems to be working, or so it appears based on the stock market’s strong gain this year. Indeed, the Nikkei 225 is up 30 percent so far this year. The real economy is responding too. Last week, for instance, we learned that core inflation is now running at the fastest pace in five years. Meanwhile, industrial activity in July grew at a healthy clip while the unemployment rate fell to levels last seen in 2008.
A constant companion with these changes has been a rising USDJPY, which is up 14 percent this year. But all of that rise came in the first five months of 2013. Since then, USDJPY has been drifting lower, sparking concern that the bull run in stocks faces new headwinds. But for anyone who bases that forecast on anticipating a stronger yen, the Bank of Japan’s (BOJ) deputy governor last week advised otherwise. The monetary stimulus is still “in its early stages, and I hope you will be patient enough to see its effects permeate the economy,” he said last week.
Patience will hold out at least until Wednesday, when the BOJ delivers a scheduled policy statement. The central bank has previously said that it plans to keep its quantitative easing program rolling until inflation stabilises at 2 percent. By that benchmark, there’s still a way to go. Core inflation at the consumer level rose 0.7 percent in the year through July. James Picerno of trading floors
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