February 3rd, 2012
Posting throughout much of Friday’s global trading session, many economies’ service-sector purchasing manager indices (PMIs) came in above expectations. Seldom would these survey-based indicators compete with the U.S. nonfarm payroll report for the markets’ attention but the positive surprises and the outright levels have economists at several dealers rethinking their prior calls for a sharp Q1 output slowdown.
Although Germany’s services PMI did not participate in January’s global tilt higher, its index started from a higher base than its peers in December (54.5) and it still led continental Europe in January (53.7). Defying calls for a slowdown, the U.K. index showed a faster expansion in services activity at the start of 2012 than at the end of 2011.
The unanticipated improvement in global PMI, however, was clearly a function of the one-point rise (to 54.1) in the US Institute for Supply Management’s PMI and the 3.8-point rise in the ISM nonmanufacturing index (NMI). UBS Securities declared, “The significant rise in the nonmanufacturing ISM survey in January, including the employment index, and reported strength in light vehicle sales, suggest that momentum is clearly picking up at the start of 2012. Our all-economy ISM index is suggesting [US] real GDP growth above 3%. However, it appears to have delinked somewhat from real GDP growth over much of the past year.” J.P. Morgan Securities called the NMI gains (seen in every major category) “staggering” and agreed that the most impressive aspect was the 7.6-point gain in the employment index.
The J.P. Morgan Global All-Industry PMI jumped nearly two points to 54.6 in January, the biggest 1-month increase since October 2010. As JPM reported on Wednesday, the manufacturing output PMI edged up a bit, but January’s acceleration in global activity was led by the services PMI, a new report out Friday. The global services activity index popped 2.4 points to 55.4, the best reading since February 2011. This lifts the composite activity index to a nearly 1-year high. “The PMI’s current level is consistent with about 3% AR global GDP growth, well above our current forecast for a 2.1% increase in the first quarter.”
Barclays Capital feels January’s return of global business confidence reaffirms stabilization in global output. The firm wrote Friday, “Our global business confidence series, based on information published by Markit and ISM, provides further evidence for broad based improvement in the leading indicators of global output. The series shows that, in addition to the solid increase in the global manufacturing confidence series seen in January, the services sector is gradually picking up as well.
The BarCap Global Business Confidence Index rose to -0.30 in January from -0.44 in December, the biggest increase in one month since February 2011 and to the highest level since July 2011. January also marked the third consecutive month that business confidence increased for both advanced economies and the ‘BRICs’. “The results, reinforced by positive data coming from the US and China, are consistent with our view that stabilization in the global industrial sector is on course.” While BarCap remains cautious due to “ongoing weakness in European data that continue to pose a significant risk to global output growth”, their economists expect global GDP growth to flatten in Q1 after declining by 0.9pp in Q4 11. They expect advanced countries’ GDP growth to accelerate in Q1 to a 1.0 % q/q annual pace (compared to 0.5% in Q4’11), while for the ‘BRICs’, BarCap economists “project a slight slowdown in Q1 GDP, mainly driven by expectations for a continued soft landing in China.” In all cases, BarCap’s GDP forecasts “conform to the signals provided by our business confidence measures.”
HSBC Global Research remarks that both the headline and new orders series within the manufacturing PMIs are firmly back in expansionary territory, adding, “Green is the dominant color for the services PMI heatmaps as well, with not only business activity but also the more forward-looking new business components picking up.” HSBC wonders, however, “What has driven this recovery and is it sustainable? Clearly, if PMIs across markets are rising simultaneously, the global trade cycle is playing a major role in the improvement. But where is the demand coming from? There are clear signs that domestic demand has picked up in [China and] other emerging markets such as Brazil and India as well. And a pick-up in domestic demand is not unique to emerging markets.”
It’s not often that an individual or collective indicator that arrives on “Payroll Friday” gets as much attention as the U.S. employment report itself. The Street, however, is definitely looking past the strong U.S. jobs data for indications that the cyclical global recovery is sustainable deeper into 2012 than just January. As risk of recession seemingly eases in the U.K. and Europe, dealers are already trimming their estimates for the scope of quantitative easing from the BoE and ECB. With the US jobs and service-sector activity posting above expectations, some dealers are also re-pricing odds for the Fed to unveil QE3.
* The Barclays Capital global business confidence indices are based on ISM and PMI national data for the following countries: US; UK; Japan; euro area; Brazil; China; India; Russia; and Australia. The data for manufacturing and services confidence are aggregated using nominal GDP weights. The series are then presented as “normalized” (i.e., divergence from mean divided by standard deviation), on a 3-month moving average basis.