PMI explained and European QE

As I anticipated, European equities took fright on Monday morning at the developments in the Ukraine over the weekend. My biggest fear now is that President Obama picks this situation as a demonstration of strength against President Putin, and in the process backs himself into a corner that he finds it diplomatically difficult to extricate himself from. 

Overnight on Sunday, details of the Chinese Purchasing Managers Survey were released. The PMI surveys are monthly reports released at the start of the month designed to indicate the health and sentiment of the manufacturing and services sector in a particular region — a composite report of both surveys is then released over the following days. The data is produced as an index with a reading above 50 indicating an expanding economy and a reading below 50 indicating a contracting economy. Economists forecast where they expect these reports will come in and then compare estimates with the final report. 

China’s official PMI for February came in at 50.2 against an estimate of 50.1, down from January’s reading of 50.5 points. The releases for Europe, UK and the US also came in slightly better than expectations; analysts had anticipated the readings to be weaker than the reports for January due to adverse weather. The better reports for Europe, UK and US did not seem to offset the negative reaction the China data received. 

There was some speculation over the weekend and in the FT today that the ECB will cut interest rates further on Thursday, and even some suggestion the ECB could introduce their own form of QE. I am personally very skeptical of this possibility. 

Firstly, and to my mind most importantly on the question of QE, the German court recently referred the ECB’s outright monetary transaction (OMT) program to the European court. I think until the legitimacy of the OMT program gets resolved, I do not see how the ECB could be seen to be buying assets in the open market. 

The rationale for the belief that the ECB is about to introduce QE is based on the fall in peripheral bond yields. This fall is in my opinion driven far more on the increased hunt for yield, than the expectations of an expansion of the ECB’ s balance sheet. 

On a rate cut, Friday’s inflation report, rather surprisingly, came in 0.1% ahead of expectations; alongside this 2014 growth estimates for the region have been upgraded modestly. Today’s manufacturing reports also came in ahead of expectations. Why would the ECB move now and not a month ago when the picture looked a little worse than it does today? My personal opinion is that these stories of QE, rate-cuts, and the possibility of other policy initiatives are leaked into the press to create an effect of monetary easing without actually implementing these measures.

Posted on March 4, 2014 .