Mish's Global Economic Trend Analysis

Eurozone Downturn Deepens, PMI at 40-Month Low; Manufacturing Weakness in Germany; Considerable Service and Manufacturing Contraction in France
Draghi Defends Bond Purchases With Warning of Deflation; Lies From Draghi on ECB Mandate and Mopping Up Liquidity
Romney Way to Left of Paul Krugman, Erza Klein, and President Obama on Trade Issues; An Idea Whose Time Never Was; Half-Right Better Than All-Wrong

Eurozone Downturn Deepens, PMI at 40-Month Low; Manufacturing Weakness in Germany; Considerable Service and Manufacturing Contraction in France

Posted: 24 Oct 2012 12:19 PM PDT

This morning Markit released Eurozone, France, and Germany preliminary PMI reports. All show further deterioration.

Germany

Markit Flash Germany PMI® shows Manufacturing weakness behind moderate drop in German private sector output during October.

Summary

At 48.1 in October, the seasonally adjusted Markit Flash Germany Composite Output Index was down from 49.2 during September and signalled a further moderate reduction in overall private sector business activity. The index has now posted below the neutral 50.0 value for six consecutive months. With the latest reading close to the average for Q3 2012 (47.9), the latest survey suggests an ongoing lack of momentum across the German private sector economy.

Lower levels of output were recorded in both the manufacturing and service sectors during October, with the former indicating the sharper decline over the month. The slight drop in services activity followed signs of stabilisation during September, while the sub-50 index reading for manufacturing production was the seventh in as many months.

Manufacturers pointed to a sharp and accelerated decrease in new orders intakes during October, thereby extending the current period of decline to 16 months. Reports from survey respondents overwhelmingly cited weakness in export markets, especially southern Europe. A number of firms also mentioned subdued demand from the automobiles sector. Some panel members pointed to signs of a slowdown in Asia, especially for investment goods. Overall levels of new work from abroad in the manufacturing sector dropped at the second-fastest rate since April 2009 (only exceeded by the fall this August).

Comment

Commenting on the Markit Flash Germany PMI® survey data, Tim Moore, Senior Economist at Markit said:

"Germany's private sector suffered a disappointing lack of momentum in October, reversing the signs of a step in the right direction during the previous month. The 'flash' output index fell back from September's four-month high largely in response to a sharper drop in manufacturing production.

France

Markit Flash France PMI® shows further marked contraction of French private sector output at start of Q4.

Summary

The performance of the French private sector economy remained weak in October. The latest Flash PMI® data signalled only a slight easing in the rate of decline of output from September's three-and-a-half year record. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, registered 44.8, showing only a small rise from the previous figure of 43.2.

Although moderating since the previous month, rates of contraction remained considerable for both services and manufacturing output.

Panellists generally attributed lower activity levels to a further drop in incoming new business. The index measuring overall new work was only marginally above September's 41-month low, and remained indicative of a steep pace of decline. Anecdotal evidence pointed to weak demand conditions amid a difficult economic climate. There were reports that clients, especially some firms in the autos sector, had postponed orders and reined in investment due to a lack of confidence in the outlook. Manufacturers again recorded a particularly steep drop in new work, primarily reflective of domestic weakness but also affected by the fastest fall in export sales since May 2009.

The rate of decline in employment in the French private sector remained marked in October, holding steady from September's 33-month record. Job shedding was broad-based across the manufacturing and service sectors.

Eurozone Downturn Deepens, PMI at 40-Month Low

Markit Flash Eurozone PMI® shows the Eurozone downturn deepens at start of fourth quarter as PMI hits 40-month low.

Key Points

Flash Eurozone PMI Composite Output Index at 45.8 (46.1 in September). 40-month low.

Flash Eurozone Services PMI Activity Index at 46.2 (46.1 in September). Two-month high.

Flash Eurozone Manufacturing PMI at 45.3 (46.1 in September). Two-month low.

Flash Eurozone Manufacturing PMI Output Index at 44.8 (45.9 in September). Two-month low.

Summary

The Markit Eurozone PMI® Composite Output Index fell for a third successive month, down from 46.1 in September to 45.8 in October, according to the preliminary 'flash' reading based on around 85% of usual monthly replies. Output has fallen continually since September of last year with the exception of a marginal increase in January.

Output continued to fall in response to a further marked contraction in new orders. The rate of decline in new business eased slightly since September, which had seen the largest drop since June 2009.

PMI vs. GDP

Comments

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

"The Eurozone has slid further into decline at the start of the fourth quarter. The survey is running at a level which is historically consistent with the region's economy contracting at a quarterly rate of over 0.5%. Official data have shown surprising resilience over the summer compared to the survey data, but the underlying business climate has clearly deteriorated markedly in recent months. While GDP may decline only modestly in the third quarter, a steeper fall looks to be on the cards for the fourth quarter."

"The financial markets may have cheered the positive developments from policymakers in seeking to resolve the region's debt crisis, notably the promise of bond market intervention by the ECB, but business appears to have been less impressed. Sentiment about prospects for the year ahead are now the gloomiest since early-2009,
when the post-Lehman Brothers crisis was in full swing."

"In addition to worries about the health of domestic markets, companies are also seeing demand weaken further afield, notably in Asia and, to a lesser extent, the US. Worries about the outlook have translated into further job losses, suggesting companies are moving increasingly into cost-cutting mode. Even Germany is not immune, with October seeing the first back-to-back monthly fall in employment since early-2010."

Agreement with Markit

For a change, I am in 100% agreement with Chris Williamson. European GDP has been resilient but do not expect it to last. Germany has been resilient and do not expect that to last either.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Draghi Defends Bond Purchases With Warning of Deflation; Lies From Draghi on ECB Mandate and Mopping Up Liquidity

Posted: 24 Oct 2012 08:52 AM PDT

If you are going to tell a lie, make it as big and credible as you can by wrapping the lies with a platitude of half-truths. ECB president Mario Draghi did just that today with a spirited defense of bond purchases, coupled with a warning about deflation.

Paragraphs in italics below are from the above Bloomberg link. My comments follow immediately.

The ECB's so-called Outright Monetary Transactions "will not lead to inflation," Draghi told lawmakers in Berlin in a closed-door session, according to a text provided by the ECB. "In our assessment, the greater risk to price stability is currently falling prices in some euro-area countries," he said. "In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it."

The problem with such nonsense is you cannot break the law while screaming you are upholding it. Draghi now sounds and acts like hypocrite US presidents of both political parties.

Both president Bush and president Obama (as well as the treasury departments under each administration) have shown little concern for the law. Increasingly presidents are of the mind "we have to destroy capitalism to save it" or as President Bush stated (and Obama practices)"I've abandoned free-market principles to save the free-market system."

For further elaboration, please see The Most Redeeming Feature of Capitalism is Failure.

"OMTs will not lead to disguised financing of governments," Draghi said. "All this is fully consistent with the Treaty's prohibition on monetary financing. Moreover, they will focus on shorter maturities and leave room for market discipline."

Translation: The OMT is disguised financing of governments. Moreover, should "market discipline" get out of line with what the ECB wants, rest assured maturities will be extended on the "whatever it takes" mandate.

Draghi explained that the ECB's intervention is necessary "because confidence in the euro has been disturbed," said Priska Hinz, the Green party's budget spokeswoman.

Confidence is disturbed because the euro is fundamentally flawed and it's too late to fix it. Certainly one huge nanny-state led by Brussels is not going to fix anything. The nanny-state will only make things worse.

Draghi said the program won't compromise the ECB's independence because it requires governments to agree to conditions. The program doesn't create "excessive risks" for euro-area taxpayers, he added, according to the ECB text.

"Such risks would only materialize if a country were to run unsound policies," Draghi said.

Unsound policies, like the ones they are running now?

Bond purchases won't fuel inflation because the ECB will absorb the liquidity created by those interventions, Draghi said.

That is a direct lie as is his opening gambit of claiming that breaking the treaty is within mandate. Yes, the ECB sterilizes the bonds it buys. However, the ECB will also accept those bonds right back as collateral for cash, thereby pumping up base money supply. The ECB has no intention of absorbing liquidity in actual practice.

Real Problem is Not Deflation

By the way, I would be remiss if I failed to point out the problem is not "deflation". Rather, deflation only seems bad because of the excess leverage that the Fed and the ECB allowed to build up.

The real problem is unsound money and fractional reserve lending coupled with misguided policies of central banks and out of control budgets everywhere one looks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Romney Way to Left of Paul Krugman, Erza Klein, and President Obama on Trade Issues; An Idea Whose Time Never Was; Half-Right Better Than All-Wrong

Posted: 24 Oct 2012 12:52 AM PDT

As amazing as it may seem, alleged conservative Mitt Romney's position on trade with China is now way to the left of that taken by leading liberal Democrats including Erza Klein who writes for the Washington Post, and Paul Krugman and his New York Times "Conscience of a Liberal" blog

Paul Krugman comments on An Issue Whose Time Has Passed written just prior to the debate on foreign policy between Romney and Obama.

Chinese currency manipulation may come up in tonight's debate — and as someone who wanted the US to take a tougher line back in 2010, I guess I should weigh in.

Basically, as Ezra Klein says, this is an issue whose time has passed.

In 2010 an undervalued renminbi was a significant drag on advanced economies, including the United States. Since then, however, two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:

At the same time. China's surplus has come way down:

Odd Times Indeed

The conclusion of Krugman's article is most amusing.

Krugman stakes out a claim that Romney's position is based on politics: "This is an odd time to be making confrontation over China's currency a centerpiece of your economic policy — unless, of course, it's just bluster aimed at making voters think you're tough."

On that score, Krugman may very well be correct. I can even spell out the politics in four simple characters "OHIO".

However, it is also possible Romney is not the economic wizard most Republicans think he is.

Certainly, when it comes to trade, Romney is no conservative or even a moderate. Rather Romney has staked out a claim that has union "progressives" cheering. Either he is a free-trade dunce or he is playing politics. I leave it to the reader to decide.

Amusingly, this seems to be an equally "odd time" for Krugman and Klein to come out of the blue to be more tolerant of free trade. Had Obama been threatening to label China a currency manipulator and Romney supportive of free trade, would Krugman and Klein have chimed in?

An Idea Whose Time Never Was

I seldom agree with anything Klein writes but his Washington Post article Five Facts You Need to Know About China's Currency Manipulation is well written and basically but not entirely correct.

My problem with this debate is simple: free trade is always a good idea. It was a good idea in 2000, 2004, 2008, and now. There was never a good time to start a trade war with China.

Also note that Klein and Krugman are merely way more tolerant of free trade, not exactly free trade advocates.

In Praise of Cheap Labor

In Fair Trade is Unfair; In Praise of Cheap Labor; Are Bad Jobs at Bad Wages Better than No Jobs at All? I laid out a claim why free trade is always good.

Please read the article if you haven't already, it contains a nice surprise in regards to my stated position.

In that article, I also asked another question "Are Paul Krugman and Mitt Romney On the Same Page?" On that score I erroneously concluded they were. Apologies offered to Paul Krugman.

Half-Right Better Than All-Wrong

Even though free trade is always good, at least Krugman and Klein see no compelling reason to start a trade war with China now. Romney on the other hand does.

Thus, (politics or not) the current positions of Krugman and Klein are far more reasonable than the pro-union position of Romney.

Whether Romney hopes to appease Ohio union voters or he is a free-trade dunce, the essential point is Romney is simply "all wrong" when it comes to China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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