2/1/2012
By David Urani, Research Analyst

Today is all about manufacturing across the world, with a series of key reports from China, Europe and the USA. The good news is that in general, the reports were above expectations, and that was enough fuel to send the world markets into happy mode. Yet at the same time, if you ask me the results out of Europe and China weren't particularly strong at face value and were indicative of the stuttering economic backdrop.

Let's start out in Europe, where the headline PMI index was at a level of 48.8, an increase of 46.9. The result was very close to the preliminary reading, so not much of a surprise. Most of the optimism seems to be coming from the UK result, which showed a nice boost up to 52.1 from 49.6, above the 50.0 consensus. Germany also continues to show strength as well, up at 51.0 from 48.4.

As a reminder, readings above 50 for these PMI indices indicate expansion and below 50 represent contraction. Overall, while the Eurozone showed improvement, manufacturing is still broadly decreasing, so I feel any optimism must be taken with caution. Take for instance the result in Spain which is being cheered for being a 5-month high, but it still solidly negative at 45.1. The same goes for Italy, which is at a 4-month high but is still below 50. Then there are Greece and France, each of which worsened.

Over in China the picture looks a little better. The consensus for their official PMI reading was for a slight contraction to 49.5 from 50.3, but instead it rose to 50.5. That had positive implications for the current state of the economy and for global trade but it was also almost too much of a goldilocks result in that it was neither cold nor hot and that worried traders who are on the lookout for fiscal stimulus from the Chinese government. A weaker result would have raised hopes for some fiscal action, while a stronger result would have obviously been deemed a success. This result landed frustratingly in the middle.  In fact, the Chinese markets traded down today due to the fact that the PMI came in strong enough that it did not necessarily support the case for the government loosening fiscal policy further, and weak enough to suggest ongoing vulnerability. 

Here at home the ISM manufacturing index rang in a 54.1 reading, which was slightly below the 54.5 consensus, but note that the December results were revised down so the increase in the index was roughly in line with expectations. Perhaps the main takeaway of the ISM is that it was the best reading since June and the third increase in a row. New orders were the standout component, up to 57.6 from 54.8; in the meantime production and employment slowed modestly but were still in the plus column. One item to keep an eye on is inventories, which remained negative at 49.5 (up from 45.5). You may remember that inventory rebuilding was a major contributor to 4Q GDP growth, and the fact that supplies have now been in contraction for a fourth straight month could support ongoing restocking activity. Overall it's a satisfactory result that can keep investors upbeat about the US market.

Construction Boost

Personally, between a rebounding housing market and industrial production capacity utilization returning near historical norms, I have been looking out for the construction market to make a rebound this year. Today's construction spending report from the Census Bureau was a nice surprise, gaining 1.5% in December and beating the 0.5% expectation. We saw some positive gains in the aforementioned sectors, starting with residential construction rising to its highest level since June at $248.5 billion annually. And then the real highlight was manufacturing, which spiked up to its highest level since March 2010 at $44.5 billion.

David Urani
Wall Street Strategies