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Economy in Brief

EMU PMIs Drop...Europe Dead? Draghi Upbeat? Oh yeah...
by Robert Brusca  March 22, 2012

The PMIs for MFG and for Services in EMU are taking it on the chin. They are dropping in value and they have crossed the Rubicon between expansion and contraction. For MFG the shrinking sector signal is in place for eight straight months. For services it is there for two straight months and over six of the last seven months. The EMU industrial orders (or real sector data on orders) that lag several months behind showed another drop in EMU orders (for January).

It has not been a good day for EMU except as far as Mr. Draghi is concerned. He pronounced that the worst is behind EMU. If that is true I’d worry about making progress so that ‘it’ does not catch-up since the worst is behind it now... And since the Euro-Area is backsliding I wonder if Europe will recapture its worst of times again? Mr. Draghi apparently does not.

Austerity and recession mix together to make a potentially potent brew. It would be foolish indeed to exclaim that the worst is behind us if we have austerity plans solidly and irrevocably fixed in place and a recession brewing. Yet that appears to be an apt description of where Europe is and Draghi has nonetheless made his statement.

In the US businesses are not allowed to lie with impunity but they are allowed to boast (best cup of coffee in NYC! Right here!). So maybe Draghi’s comment is more of a boast and more of an attempt to use some sort of leadership to focus businesses on better times ahead. But if he is wrong this could prove to be a real public relations nightmare for him. The head of the central bank cannot go out saying the worst is behind us, just before slipping into a morass of trouble. And maybe I’m wrong here, but that is where Europe seems to be headed.

The slippage in the PMI readings this month is telling. The MFG PMI went from a high-low range standing of the 57th percentile to the 52.5 percentile. Services sector slipped less but that sector is at a lower standing in the 41.1 percentile of its historic high-low range. In terms of their percentile standings in their ordered queues this month’s slippage is more impressively weak. Last month the EMU MFG standing was in the 24.4 percentile of its historic queue, meaning that it was higher than last month’s value historically about 75% of the time. This month that reading fell to the 16.4th percentile. That means it is worse than this only about 16% of the time. The services metric stands lower this month too, in the 12.7 percentile of its historic queue, down from the 14th percentile last month.

The raw readings show the MFG PMI at 47.69 and the services reading at 48.74, both signal contraction. So Draghi’s comments are surprisingly upbeat in the face of such data. We know that sovereign debt issues stalk the Zone and its banks are troubled and, just yesterday Ben Bernanke publicly asked Europe to mend its finances. Today Draghi is all but thumbing his nose at Ben.

I do not know if this is just an unfortunate juxtaposition in central bank commentary or if Mr. Draghi has purposely made his comment to deflect what Bernanke said just yesterday. It would be bad thing for the heads of these two very important central banks to be at loggerheads personally and maybe worse if the two of them see the risks in markets as being quite different.

In any event there is a limit to what talk or central bank ‘leadership’ can get for you. Draghi is the new the guy on the block and is ‘unknown’ and trying steer his way between the hard money German faction and the ‘que pasa’ view of the Mediterranean South. Bernanke of course has his own travails and detractors but overall has been a Chairman of accomplishment with the opposition coming more from fringe snipers than from the mainstream - but snipers can be lethal too.

On balance I am not reassured by Draghi and wonder what new plan his rhetoric is trying to hatch. Seeing the large German firm Taunus restructure to evade the requirements of more capital in the US does not do any good for my ability to sleep at night. Europe’s biggest danger is not from US regulation but from within and from any risk that the US swap facilities might not be extended to help those who evade US regulatory reach. One has to think that we have not heard the end of this. I can’t see the US regulators letting such a key player slip though such a gigantic crack in the regulatory wall. If the crack is that big there will be no wall left at all. Cracks kill.

FLASH Readings
Markit PMIs for the Euro-Area
  MFG Services
Mar-12 47.69 48.74
Feb-12 48.96 48.85
Jan-12 48.78 50.45
Dec-11 46.94 48.80
Segment Averages
3-Mo 48.23 49.54
6-Mo 47.78 48.65
12-Mo 50.68 50.87
159-Mo Range
High 60.47 62.36
Low 33.55 39.24
% Range 52.5% 41.1%
Range 26.92 23.12
Average 51.43 53.58
Queue % 16.4% 12.7%
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