Soft US and Euro Area PMI Suggests Sharp Economic Contraction in US and Europe

The stock markets have been suggesting it for a while, and that is probably why they ignored the latest PMI figures from the US and Euro area. A two trillion USD fiscal stimulus is also helping the mood amongst investors.

On March 24, we received a comprehensive update on the economic situation via the US and Euro area PMIs, and the situation is not good. The Euro area PMI composite dropped to 31.4 from 51.6, and lower than the 38.8 projected, while the US Markit PMI composite declined to 40 from 49.6. However, both the manufacturing sectors in the US and Europe performed better than expected. In the US, the drop was minimal, and we saw a decline to 49.2 from 50.7.

The most significant losses occurred in the service sectors, given the shutdown of bars, restaurants, hotels, flights, gyms, and more. The drops in the PMIs are also suggesting that job losses are increasing very fast in the US, with losses at 2009 levels, according to Markit, the producer of the report. For this week’s initial jobless figures, economists anticipate that one million people applied for unemployment benefits.

Markit is also reporting that the drop in the PMI suggests that the US is contracting by 5% annualized. In Europe, the PMI indicates that the economy will contract by 2% in the first quarter.

Despite the weak figures, the Dow Jones and DAX index was up by 13.88%, and 20% from their yearly lows at the time of writing. One explanation is that the stock markets have already dropped aggressively and effectively pricing in the weak figures. Also, central banks and governments worldwide have been supporting the economy, and people in these difficult times.

What’s next?
As lockdowns have been extended in Europe, likely, the next PMI reading will also be bad. However, the stock markets are forward-looking, and I suspect that they will be more interested to see what will happen with the development of Covid-19, and how the Chinese economy is doing, for clues to what may happen in Europe and USA, following the lockdown.

The next China PMI from Markit will be published on April 1, and it will probably be too early to see any improvements, however, if we see a bounce in the index, then this could spur stock markets higher.

China had a total of 81,218 coronavirus cases, but the latest update shows that they only have 4287 active cases, a significant improvement. Also, median intercity travel in the 50 biggest cities was down by 18% from the pre-lunar New Year, showing that there is a way out of this crisis.

In Italy, the situation has also improved, with the daily percentage growth rate dropped to single figures in the last two days. As factories are now closed in Italy, and they extended the lockdown with a few more weeks, we could see people returning to work soon, as they have in China. The big issue for traders is if the lockdown will have secondary effects as weak firms go bust on the lockdown, and how long the lockdown in the US and Europe will persist.

Analysis by Alejandro Zambrano, ATFX Global Chief Market Strategist

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