PMI Data Sinks Markets
Market Commentary
By WSS Research Team

By Carlos Guillen

After making one of the strongest gains this year on Friday, equity markets are sinking today as PMI data from everywhere is depicting a very gloomy global economic picture.

During the trading session today, ISM released its Purchasing Managers' index (PMI), considered by many to be a very important health indicator of the manufacturing industry here at home. PMI in June clocked in at 49.7%, decreasing from the 53.5% reported in May and landing below the 52.2% consensus estimate. Given that a reading above 50% indicates the manufacturing economy is generally expanding, June's reading represents the first contraction in the manufacturing sector since July 2009. The news was clearly disappointing, but there is still some life left in the economy as a PMI over 42.6%, over a period of time, generally indicates overall economic expansion, and the result indicated the 37th consecutive month of overall economy growth. The big question, however, is just how much more life do we have left. June's result was the second drop since reaching a yearly high in April. Perhaps even more worrisome was that the orders index dropped so precipitously, by 12.3 percent from 60.1 to 47.8. This drop in June orders was the biggest since October 2001, after the September 11 terrorist attacks. Orders from the PMI report is considered to be leading indicator and tends to forecast the short run in the industry and in the economy. This huge drop is very troublesome for the manufacturing sector, and at the moment it has served to give investors a good scare.

The economic malaise is not just here in the U.S., in the euro zone manufacturing took another hefty blow in June, and factories are preparing for worse to come. According to Markit's euro zone PMI, jobs were cut at the fastest rate in two-and-a-half years. The index was unchanged at 45.1 in June, above the preliminary reading of 44.8 and holding at its lowest reading since June 2009. In China, PMI also slipped to seven-month lows as overseas orders dropped. HSBC Holdings Plc and Markit Chinese PMI fell to 48.2 in June from 48.4 in May. It is becoming clear that the globe's economy is slowing, and the main cause is stemming from Europe. Confidence is falling everywhere, and corporations are holding back on new orders in all developed nations. Consequently, exports are shrinking fast, and GDP estimates continue to decline.

In all, the manufacturing data posted today from around the world is painting a much clearer picture, which is one of rapidly slowing growth in the short run. Even from the most bullish points of view, one has to admit the economic situation around the world is not as good as it looked a couple of months ago.

World Production Flop
David Urani

Today we got manufacturing numbers from around the world, with the Markit indices from around the world, along with China's official PMI reading and our own ISM number. The Markit Eurozone index was flat from May to June, but remained well in the contraction zone at 45.1; that included a drop in Germany's activity to 45.0 from 45.2. Then there was Markit's China PMI, which was down further into negative territory, to 48.1 from 48.4 (note: the official government China PMI reading also came out at a 7-month low of 50.2 versus 50.4 previously). And of course, we got that dismal ISM number for the USA which was at its worst point since early 2009.

Aggregating all the various world data, JP Morgan issued its own world manufacturing index which fell from 50.6 into negative territory at 48.9. This was the lowest level of world manufacturing in three years. And with the USA now joining the Eurozone and China to complete the trifecta of negative readings (below 50), one could officially declare global crisis.

Construction Spending

The housing recovery theme continues, with US construction spending data being posted for May. Overall spending was up 0.9% month to month, beating the expectations of a 0.2% gain. As you might have expected, it was residential construction that led the way, increasing by 2.9%; non-residential spending was flat. At a $267 billion annual rate of residential construction, this was the highest level since January 2009.

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