‘Dire’ Final PMIs Underscore Depth Of European Slump, Pernicious Brexit Impact

Final PMIs for December underscored the extent to which, signs of inflection and other glimmers of light at the end of various tunnels notwithstanding, the global economy is entering a new decade on the back foot.

The final read on IHS Markit’s manufacturing PMI for Europe is 46.3. That’s marginally better than the 45.9 flash print, but still represents a deceleration from November, and a sharp slide from where things stood at this time last year.

New orders have been in contraction for 15 straight months, the headline gauge for 11.

The numbers “highlight the continued underlying weakness in sector performance [as] the PMI averaged 46.4 in the final quarter, unchanged on the previous quarter’s near seven-year low”, IHS Markit said Thursday, adding that “both production and new orders continued to deteriorate markedly during December”.

And yet, bund yields were all the way “up” (and that’s still an oxymoron considering we’re talking about negative territory) to -0.17% at one point Thursday. That is 55bps off the August lows. There’s an argument that the surge is in keeping with rising inflation expectations, but “expectations” is the key word there. It all comes back to whether the Q4 reflation narrative is more fact or fiction, and whether the optimism engendered by the trade truce and Brexit clarity has any staying power.

“The [ECB’s] sizable holdings of German debt and negative net issuance will bolster their scarcity premium”, Bloomberg’s Michael Read wrote Thursday, adding that “even if talk of a technical recession in Germany re-emerges, the aversion to deficit spending will remain ingrained in the German psyche”. Combine that with the distinct possibility that trade tensions return and political turmoil persists, and you’ve got a recipe for persistent downward pressure on yields, even if the German 10-year manages to climb back above zero in the first half.

IHS Markit’s Chris Williamson drove home the harsh reality:

Eurozone manufacturers reported a dire end to 2019, with output falling at a rate not exceeded since 2012. The survey is indicative of production falling by 1.5% in the fourth quarter, acting as a severe drag on the wider economy.

Meanwhile, the final read on the UK manufacturing PMI offered nothing in the way of solace. 47.5 is the second worst print in seven years, and marks a precipitous drop from December of 2018. December was the eighth straight month in contraction.

The survey period included the aftermath of the election, which of course handed Conservatives a huge majority.

Duncan Brock, Group Director at CIPS, delivered an urgent-sounding assessment of the need for Brexit uncertainty to dissipate. “The pace of manufacturing’s decline in December will set alarm bells ringing as production levels sank at their fastest levels since July 2012 with no sign of immediate recovery in sight”, Brock said, adding that Brexit, combined with the effects of a slowing global economy, caused new orders from domestic and export markets to “dry up at one of the fastest rates seen in seven-and-a-half years”.

For a chuckle, consider all of that in the context of the pound’s best quarter in a decade and a 3% rise for the euro in Q4.


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