The HSBC/Markit PMI in the chart above shows that Chinese manufacturing is contracting, and even the official PMI points to stagnation. The Chinese slowdown will be suppressing world economic growth for the immediate future. The effects of the contraction are spreading far and wide with falling PMIs in South Korea and Germany and declining raw material production in Australia. In the meantime, the PBOC seems willing to sacrifice short-term growth in order to slow credit creation, so this dynamic won’t be ending soon.
The latest PMI for American manufacturer can be summed up as, “more of the same.” As you can see, the PMI has moved up and down between 50 and 56 since 2010. The “good news” in June’s report was that manufacturing employment began contracting, and this is a sign to Fed watchers that Uncle Ben won’t turn off the magic money machine anytime soon. The most intriguing tidbit from the report is that export orders tanked to 46.3 deepening the contraction that began last month. The Chinese flu spreads.
The EU follows the golden rule, “He who has the gold, makes the rules.” Today, it is the Germans who have the gold. The ECB kowtows to the Bundesbank with the Germans receiving the monetary policy they want, which results in a policy much too tight for the periphery.
The Germans are also driving the talks on the banking union. Germany will not agree to anything that requires it to commit funds prior to elections in September. Once Merkel is reelected, the government will probably change its mind, much to the great chagrin of the German taxpayer. Until then, there will be no progress on a banking union, though you may see a well-parsed political press release here and there.
Keep an eye on the bond markets. Liquidity dries up in summer, and this rout could intensify once people see their June account statements. The large outflows so far have not led to stressed selling, because fund managers are drawing down cash reserves and selling treasuries. Once this buffer is depleted, look out below.
Here’s some more doom and gloom for you. Which do you want first? Okay, the gloom it is. While the Eurozone PMI’s rise is pointing to an end to the recession at the present rate of change, the number masks the real story. German manufacturing has begun contracting. If Germany slows down, the Eurozone recession will endure. This news is not surprising as contracting China is Germany’s best customer.
Now it’s time for the doom. Eurozone unemployment has risen to another record, 12.1%. The patience of European voters is wearing thin, and as it does the spectre of populism returns to the Continent.