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Big PMI Deceleration in Europe

11/21/2014
By Jennifer Coombs

In a surprising turn of events, China and Europe have actually become the culprits behind the global market rallies on Friday November 21st, including the one here in the US. The People´s Bank of China decided to cut its benchmark one-year lending rate by 40 bps to 5.6%, which is the first rate cut since July 2012. Overall, the cut was meant to ease their slowing economy with policy rather than provide a major stimulus. Chinese policymakers also decided to increase ceilings for deposit rates to 1.2 times the benchmark rate from the previous 1.1 times. In Europe, the European Central Bank’s (ECB) Mario Draghi came out super dovish today, saying that the ECB would broaden its asset-purchase program to address inflation concerns. As a result, the euro tanked against the dollar by about 0.9%. Despite these policies, US investors are not complaining – the Dow Jones, S&P 500 and NASDAQ all touched new highs today. The more exciting news is that the Dow is now less than 200 points away from hitting the 18,000-level. While China’s rate decline was a welcomed monetary change, Europe continues to struggle across all facets of its economy. In particular, both the manufacturing and services purchasing managers’ index (PMI) are showing weakness across all European economies, even among the largest two economies: Germany and France.

The composite PMI in the Euro Area decreased to 51.40 index points in November from 52.10 in October, the lowest level in 16 months. While manufacturing expanded modestly, growth in the service sector hit an 11-month low. It was a similar scenario in Germany, where the composite PMI decreased to 52.10 in November from 53.90 in October to the lowest level since July 2013. France has struggled to maintain a level above 50 for much of 2014, but posted a slightly higher composite reading of 48.4 in November from 48.20 in October. Despite the increase, the number is still dismal. While unprecedented stimulus by the European Central Bank (ECB) is likely to start in coming months, weak growth in Germany and France, on top of rising tensions in Ukraine, threaten to dampen this revival.

The chart below shows the monthly composite PMI (services and manufacturing) for Germany, France and the Euro Area over the last year, with November’s reading as preliminary. Remember that a reading above 50 is indicative on economic expansion, a reading below 50 is contractive, and a reading at 50 indicates no change. France’s readings have been consistently below 50 for the last seven months and although Germany and the EU remain well above the 50-level, November’s preliminary readings are the lowest all year.

Jennifer Coombs
Wall Street Strategies

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