Tuesday, September 4, 2012
We will get the August manufacturing ISM report today, with expectation of modest increase from July’s 49.8 level. An in-line or better ISM reading today will mean that the U.S. manufacturing sector has moved back into ‘expansionary’ territory after staying in ‘contraction’ mode for the last two months. But private-sector gauges of the sector in Europe and Asia are pointing towards growth troubles. The HSBC China PMI measure for August fell to 47.6, below July’s level and the lowest since March 2009. The Markit Euro-zone PMI measure for August was under-50 for the 13th straight month, though the August reading was a bit better than the previous month.
The markets are looking to central banks to address this growth issue. Bernanke indicated on Friday the Fed’s readiness to do more should conditions warrant and this week’s economic releases, particularly Friday’s August jobs, report will determine what the Fed does at next week’s FOMC meeting. Many expect the European Central Bank to announce a bond-purchase program at their scheduled meeting this Thursday. Mario Draghi, the ECB President, indicated in his briefing to a special panel of European parliament that they can purchase short-term government bonds in the secondary market. But in addition to persistent German opposition to such a plan, the ECB will also require Spain (and/or Italy) to request such action. And there are signs that Spain may not promptly comply on that count.
Most of the market’s summer gains are due to such hopes from the central banks. It will be interesting to see if the market can sustain the gains in the absence of prompt central bank action. We will know for sure this Thursday from the ECB and the Fed next week.
Sheraz Mian
Director of Research
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