Global Composite PMIs Hit the Pause Button As Tariffs Loom

There are two sets of trends in February composite PMI readings. The first and most impressive story is how strong the readings are. The median reading in February is 55.2 with a median standing in the 91.8 the percentile of its five-year queue of data. This compares to a much weaker average value of 53.8 in February with a much lower average value standing in its 55th queue percentile. This lower average reading is indicative of the second trend which finds a host of smaller countries with weaker readings and smattering of weakening in trends in January and February per se despite still high levels being posted on the composite PMIs.

The EMU-wide measure weakened in February, pushed lower by weaker readings in Germany, France and Italy, the three largest EMU economics. India weakened rather sharply from 52.5 in January to 49.7 in February and now shows contraction in February. The UAE, a small country but a large oil producer, weakened as well. The two largest economies in Asia, Japan and China, also weakened.

Ignoring the U.S. and the EMU aggregate reading, the table has 14 country observations and seven weakened on the month. However, growth is still the order of the day as only India in this group has a reading below 50, indicating contraction. And while there is a huge difference in rankings of the overall median and average readings, clearly the standings for the average are more reflective of reality than the median since the weakest countries are also some very small ones (the UAE and Saudi Arabia) but there are also some countries of substantial size with queue standings well below 50 (U.K. and India).

However, if we evaluate trends by looking at the trend in the sequential readings, the median readings do show a steady and faster deterioration in progress than the average readings do. But only three countries show deterioration in their three-month average readings compared to their six-month average. Only two countries have a weaker six-month reading than their respective 12-month readings. But in January seven of the fourteen (excluding EMU and the U.S.) saw declines month-to-month in their PMI readings. Perceptions of weakness depend a lot on the horizon chosen to analyze.

For now the best description of all this is that the PMI readings are high and are showing some oscillation and minor deterioration around current levels. But there is a lot in the mix that underlies these readings. Italian elections have just produced a stalemate for Italian politics. China has set its new economic parameters and seems to be ready to address some of its debt issues, but it is too soon to conclude that it will actually follow through on that. It did keep its growth objective at 6.5% and has cut its deficit-to-GDP ratio target to 2.6%. There are also the hated Trump steel and aluminum tariffs and Europe's implied counter threat and the Trump counter to their counter...and so on. That is another obvious risk that was flagged in a comment from the IMF today.

What seems evident is that the upward momentum as depicted by the PMIs is running out of gas. EMU-wide retail sales did back off in January (reported today). U.S. retailing has been showing weakness as well and unit auto sales in February continue to slide in the U.S. and in the U.K. I see a loss in consumer momentum despite some strong PMI industrial readings. And I also see PMI readings that are outstripping traditional IP readings- do not take a PMI only view of the world. That may prove to be too rosy. It is too soon to sort things out, but the new trade tensions open up the prospect of a more damaging downside and markets have been reacting to that. I don't think that we can forecast or handicap economic data until all this risk of commercial policy action is sorted out and either deflected or set in motion.

In addition, the geopolitical environment is still quite hot with the lone caveat that the Koreas have managed to meet and have some talks. China has stepped up its bellicose rhetoric on Taiwan. Iran is still developing its missiles to the displeasure of the U.S. And Russia, despite arms limitations treaties, claims to have developed missile that can penetrate U.S. air defense systems. But there is also some stability as Angela Merkel has finally sorted out her political arrangement and is ready to govern again but with a new set of constraints. In Japan, just before the weekend, Bank of Japan Governor Haruhiko Kuroda finally pointed to fiscal 2019 as a likely date for Japan's end game for stimulus to begin to reverse.

Things are truly in flux globally. There is a lot to handicap here from the economic trends to new policy initiatives to geopolitical risks. So don't be surprised if we end up with market volatility as markets try to sort all this out. The Trump tariff threat alone is a big issue for markets to digest and it is still largely an unknown because it is not well articulated yet and because no matter how small or limited it may start out, there is the risk that it can metastasize.