Can Flash October PMIs Turn the Markets Around?

Global equity indices have been on the backfoot this month, thanks to a drop off in risk appetite. Normally October is a time of rebound from September, but the heightened tensions in the Middle East on top of a rise in global interest rates have put a damper on investor appetite.

Europe in particular is seeing clouds on the horizon, after a year of practical economic stagnation. That the ECB is no longer expected to hike rates, despite still high inflation, is seen as a weight on the shared currency. But, weakness in the dollar as American yields falter in the face of safe haven flows have helped buoy the Euro of late.

Time for a Rebound?

The Euro could get an extra wind if there were some more definitive signs that the economy is starting to stretch its legs, finally. That could come in the form of PMI figures, which are typically leading the economy. PMIs have been in contraction through the whole year, and are expected to remain there. But recent trends suggest that they could be improving, though it’s an open question whether that will be enough to reassure investors.

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On the other side of the more optimistic view for the medium term is the series of short-term challenges that seem to be facing the shared economy. With Europe largely dependent on energy imports, the recent rise in crude prices could have a stifling effect on growth. A substantial portion of Europe’s energy comes from the Middle East, which could experience an interruption if tensions escalate too far – or, at the very least, the cost of insuring transportation could cause prices to rise. Over the weekend, it was revealed that EU officials were considering reinstating gas price caps that had been used last winter due to the Russian invasion of Ukraine. This came after the price of natural gas in Europe spiked last week.

What the Data Says

Investors are going to be looking for signs that business activity has picked up recently. They will be looking closely at the new orders and prices paid components to see if they are rising or falling. New orders means that businesses have more confidence that the economic situation is improving. Prices paid increasing would translate potentially into future inflation. Both could support the respective currency.

Australia: Preliminary October Manufacturing PMI is expected to be largely unchanged at 48.6 compared to 48.7 prior. For Australia, the main issue is how China is evolving, and without a recovering in the Asian giant, industrial activity could remain just slightly in contraction.

Japan: is expected to see its manufacturing PMI improve to 49.0 from 48.5, though still in contraction. The debate over whether or not to loosen YCC again relies on the recent increase in Japanese economic activity, so signs of continued improvement could incline the scales towards tightening.

EuroZone: For Europe, the focus is likely on Germany, where the economy is expected to fall into recession in the latter half of the year. A substantial improvement could mean Germany might avoid that fate, and that could strengthen the Euro. German Manufacturing PMI is expected to improve to 40.5 from 39.6, which would still be well into contraction and among the worst of the major economies in the world.

The UK: is expected to see manufacturing PMI this month improve to 44.9 from 44.3 prior, with the main focus for the pound likely to be for signs of whether inflation pressure is abating.

The US: Manufacturing PMI in the US is expected to remain marginally in contraction at 49.5 compared to 49.8 prior, despite the expectation for strong economic growth. The focus is likely to be whether the economic dynamism continues after Q3, which could keep inflationary pressure up.

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