Slew of Bad Economic Data Upsets Markets

It turns out the Federal Reserve and the European Central Bank had good reasons to reassure markets with their recent monetary easing programs, as economic data out of the United States, Europe, and China signals a global slowdown.

In China, the HSBC Flash PMI released in the early morning on Sept. 20 in Hong Kong showed that a key forward-looking gauge of Chinese economic activity remains below 50 for the 11th consecutive month. It came in at 47.8, a slight improvement over the August figure of 47.6, but readings below 50 indicate contraction in manufacturing. “Little changed from last month, mirroring the poor state of the economy and indicates Q3 is likely to see further decline in GDP growth,” writes BNP Paribas in a note to clients.

The Shanghai composite index lost 2 percent to close at 2024, marking a fresh low in its descent from a peak of 3412 points reached in July 2009. The previous bottom after the Great Recession crash was marked in October 2008 at 1728.

Wayne Lin, a strategist and portfolio management analyst who helps oversee Legg Mason’s $636 billion in assets, told The Epoch Times “it’s a tricky time right now” and the “indication that Chinese growth is really slowing down is affecting the market.”

Before trading started in the United States, news out of Europe came out that wasn’t much better. The flash PMIs released on the other side of the Atlantic showed the economic situation in Europe is unlikely to improve anytime soon.

The composite PMI for September printed at 45.9—also in recession territory—falling from the August level of 45.9 and missing expectations of 46.6. While activity in Germany improved from 47 to 49.7, the situation worsened, particularly in France—down to 44.1 from 48—as the composite for the whole of Europe is now at a 2009 low. Lin highlights that the French numbers are “concerning.”

Markit chief economist Chris Williamson also paints a bleak picture: “… The region suffered the worst quarter for three years. The flash PMI is consistent with GDP contracting by 0.6 percent in the third quarter and sending the region back into a technical recession.” The EuroStoxx 50 closed the day down 0.57 percent.

U.S. Data Mixed as Markets End Day Flat

Given the bad global data, the S&P 500 fell out of bed and lost 11 points at the open before recovering during the rest of the day to close unchanged at 1460.

The United States also had a few data points to grapple with, which took analysts some time to decipher. The Philadelphia Fed’s September Business Index survey came in above expectations of -4.5 for example, but was still negative for the fifth month in a row at -1.9. Respondents who took the survey indicated that production at their company will be lower in the third quarter in 46.8 percent of the cases.

Compared to Europe and China, the United States still has an expanding manufacturing base. The Markit Flash PMI was unchanged at 51.5 in September, signaling continued expansion, albeit at a sluggish rate. Jared Franz, the U.S. economist at T. Rowe Price, says that “50 is not great, it is just showing that we are treading water.”

Market participants also cited the improving housing data released Sept. 19. Existing home sales were up 9.3 percent while median prices for existing homes rose 9.5 percent to $187,400 compared to August 2011 according to the National Association of Realtors.

“U.S. housing is much better and the flash PMI here in the U.S. is also in line with expectations. U.S. data on balance is coming out as expected,” says Lin.

Housing is still at depressed levels, however, and is unlikely to have a meaningful impact on economic activity for the time being, said Franz. “That component of the economy is doing pretty well. It’s a bright spot, but it’s a small component… It’s not a huge segment anymore like it used to be,” he said.

Initial jobless claims missed expectations, coming in at 382,000 versus 375,000 expected, but Franz judges this level to be commensurate with the current growth environment that we are in. Wayne Lin laments the “slow job creation” and thinks “that’s why the Fed is being as aggressive as it is.” Jared Franz also thinks “that’s why you got the Fed on the move.”

“The stock market as of late has been supported by all the monetary easing both at the ECB and the Fed. … Investors are weighing right now the positive of supportive monetary policy and the negative of the bad economic data,” comments Lin, who thinks that the Fed’s latest round of quantitative easing (QE3) will help the housing market, spur economic activity and lead to a higher stock prices. “If the housing market does recover … If that happens, then we are off to the races.”

Franz, however, thinks that QE3 will only be slightly positive, as “the interest channel has already come down,” meaning that consumers won’t refinance more just because mortgage rates are 10 basis points lower. To him, there are other issues that are affecting markets, irrespective of Fed policy: “The reason for what’s been subdued growth over the last year is Europe and China, slowing EM growth and the fiscal cliff. The domestic fundamentals are OK, you just have this big uncertainty hanging over you.”

Despite QE3 excitement and a host of economic data around the globe, the S&P 500 traded within a 15 points range for the whole week, something that traders think has to do with the triple witching expiry of stock options, index options and index futures on Sept. 21. In addition, Friday will see a reweighting of the S&P 500.

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