Don’t Read The Fine Print On Best German Factory PMI In 13 Months

In what is likely to be a recurring theme over the next several weeks, preliminary PMI data out of Europe was littered with caveats to account for the indeterminacy surrounding the fallout from the coronavirus.

Normally, a big beat on Germany’s manufacturing PMI would be cause for celebration or, at the least, for a somewhat durable bounce in the beleaguered euro. But Friday’s flash read on IHS Markit’s gauge was met with skepticism, not least because the report itself struck a decidedly cautious tone.

The flash read on the factory gauge for February is 47.8. That’s the highest in more than a year, and more than three handles better than consensus. It also topped the most optimistic estimate from 33 economists (the range was 43.5 to 46).

New orders rose to 48.9, the best reading since September of 2018.

And yet, reading the accompanying color is like listening to the weather report on a sunny day before a hurricane is expected to come calling.

“Almost half of the index’s month-on-month gain was attributable to a deterioration in supplier delivery times, which panelists predominantly linked to coronavirus-related disruption in China”, IHS said, adding that the “latest data indicated signs of renewed weakness in new export orders across both manufacturing and services [as] overall inflows of new business from abroad fell markedly and at the fastest rate for three months”.

Although the report notes that, generally speaking, sentiment is better than it was during 2019’s darkest days, a sense of impending trouble hangs over the commentary. Here’s Phil Smith, Principal Economist at IHS Markit:

The manufacturing PMI defied expectations in February to move to its highest in 13 months. Though there were positive contributions from all five components, the observed jump in the headline index flatters the sector’s current trajectory, with longer input delivery times stemming from disruption to supply chains in China having an unduly positive effect.

“The new export order gauge dropped to 45.1 from a revised 48.9 and sets up for further revisions when the final prints come in”, Bloomberg’s Laura Cooper remarked, on the way to flatly noting that “it would be premature to cheer today’s beat”.

Indeed. Especially considering that data out earlier this month showed factory orders plunged a ghastly 8.7% on year during the final month of 2019, the worst showing in a decade. The very next day, Germany said industrial production crashed 6.8% YoY in December, nearly double the expected decline.

And that was before the impact of the virus.

Fingers crossed on fiscal stimulus. (Chuckle)

Read more: Germany’s Obsession With ‘Black Zero’ Fiscal Policy Now Borders On Psychosis

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