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Joshua Brown


Curated by Joshua Brown, The Reformed Broker

Side Street

View From the Blogs

Euro PMI Crashes the Party

Posted on 02/21/13 - 11:15 AM EST

The cocktail for the early 2013 rally is not unfamiliar to investors -- its the same package that drove stocks in early 2011 and 2012. The U.S. has modest growth, China will accelerate and take the world with it, and Europe "can't get worse". But in 2013 I suppose we can add the "Japan is the next U.S." in terms of debasing and printing.

There has been little rebound in economic activity in Europe the past few months, but the data has been so bad that on a relative basis there has been improvement. Things went from putrid to awful and Wall Street is a relative expectations game -- "beat expectations" -- and that's been good enough for markets. Ironically, one of the drivers of the 2013 rally (the relentless drop in the yen) could become a major thorn in the side of the "it can't get worse in Europe" meme, as it potentially impacts Germany's export machine. On a relative basis German goods get more expensive to Japanese goods each day the yen free falls. (Note -- the data has not reflected this yet as German manufacturing was one of the bright spots in today's data.) Overnight we have the flash purchasing managers index data from Europe and things have gone in the other direction... i.e. they can get worse.

The Markit preliminary euro-zone PMI for February fell to a two-month low of 47.3 from a January reading of 48.6. A reading of less than 50 signals a contraction in business activity. Economists had forecast a reading of 48.5.

While the U.S. and Japanese market's have "decoupled" the last few weeks, major European markets (ex UK) are back to flattish /negative for the year.


Futures are down a bit on the news flow so we'll see how quickly this is bought, as every dip -- however shallow -- has seen buyers show up this year. Yesterday's lack of afternoon buyers was certainly the exception rather than the rule in 2013. But it takes more than one burnt hand at the stove to stop the Pavlov dogs.

Via Bloomberg:
  • Euro-area services and manufacturing contracted at a faster pace than economists forecast in February as the economy struggled to recover from the deepest recession in almost four years.
  • The euro-area services index fell to 47.3 in February from 48.6 in January, its steepest drop in 10 months, today's data showed. The manufacturing gauge slipped to 47.8 from 47.9.
  • In Germany, Europe's biggest economy, the services measure fell to 54.1 in February from 55.7 last month, the sharpest decline since August. The German manufacturing gauge rose to 50.1, moving into expansion for the first time in a year.
  • France's services gauge fell to 42.7 this month from 43.6 in January, while its manufacturing index increased to 43.6 from 42.9, today's data showed.

As for the Fed I still expect easy money for years... many speculate the minutes were just a trial balloon by the Fed to see market reactions. If they still require such balloons to see how dependent markets have become on the constant babysitting necessary by the central bank, they have not been paying attention.

Bigger picture for the first time in a long time, bad news mattered yesterday. A change. Long uptrends however don't usually just reverse in one strike, so the nature of the buying / rebound will be of particular interest. While the Feb 4th reversal was sharp on the indexes (and immediately reversed the next day) I saw MUCH more damage in individual names yesterday than on the 4th.


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