European Manufacturing Rebound

Daily Analysis - 05/01/2016

Euro Area Constituents Indicate Continued Manufacturing Expansion

Markit reported growth and economic health in the Euro Area manufacturing sector for major economies with results released for Italy, Spain, France, Germany and the aggregate figure suggesting sustained expansion. Despite slight declines in several countries, growth expanded modestly for all countries with figures obtained above the 50 expansion mark for all measured.

Euro Area Manufacturing Grows

The four largest Euro Area member economies released results indicating manufacturing expansion in December. All values printed above the 50 mark with Spain moderately decelerating to 53.0 in December from 53.1 in November. France also experienced a slight decline to 51.4 from November’s 51.6. These small declines were offset by gains for both Germany and Italy, resulting in 53.2 and 55.6 expansion respectively, surpassing the prior month’s values of 53.0 and 54.9. The aggregate Euro Area manufacturing PMI also improved, rising to 53.2 in December compared to the 53.1 reported in November as the ECB’s accommodation takes root in the economy. All values obtained signaled a solid year end of the sector for the year of 2015. While the Euro did not display any major momentum during the announcements, the common currency slumped near the close of European equities.

British Manufacturing Decelerates

Manufacturing for the United Kingdom ended 2015 on a disappointing note after Markit reported a decline in the manufacturing PMI for the month of December to 51.9, the lowest print in 3-months and down from November’s revised 52.5. Consumer goods and new order growth were the main drivers of production during the latest reading. On the whole, manufacturing continues to improve in the UK according to the figures, with the slower pace of growth offset by the expansion in new export orders for the fourth consecutive month as a byproduct of the decline in the value of the Pound Sterling. Employment continues to improve as more jobs are created and the weak Pound aids expectations of rising exports over the calendar year which is likely to translate to sustained growth in the economy and the possibility of monetary policy normalization later in the year.

US Output Slips

The Institute for Supply Management reported a manufacturing decline for the month of December, reporting the fastest pace of decline since June 2009. The ISM Manufacturing PMI contracted during December with the figure slipping to 48.2 compared to November’s 48.6, missing consensus estimates of 49.0. The decline was mainly attributed to the decline in new orders, production, employment and raw materials. Factories in particular cut staff at the end of 2015 due to the stagnant international trade conditions and a stronger US dollar. The dollar is expected to hold back exports for the remainder of 2016, leading to further declines in economic activity. Already, the Atlanta Federal Reserve has indicated that fourth quarter growth will experience a substantial decline, with the model currently predicting meager 0.70% growth during the period, marking a substantial downward revision from earlier estimates.

Turkish Stagflation Surges

Annualized inflation for Turkey climbed to 8.81% for the month of December, exceeding the prior month’s value of 8.10%. Inflation seems to be accelerating more than estimated by the country’s Central Bank Governor, Erdem Basci, who forecasted a 6.90% in July and raised estimates to 7.90% in October due to a weak Turkish Lira. It is the fifth year that the inflation target of 5.00% has not been met by the Central Bank. The Deputy Prime Minister assigned the blame to the 30.00% increase in the minimum salary as the main factor contributing to higher inflation. The consumer price index recorded the greatest increases in the price of hotels, cafes and restaurants which rose by a 13.23% annual pace. Furthermore additional gains were reported from recreation and culture. The USDTRY currency pair responded to the announcement by surging higher to 2.9498.