PMIs Are a Bit More Mixed in January; Europe Is Stronger/U.S. Is Weaker

The flash PMIs from Standard & Poor’s in January resemble a Fleetwood Mac song as they go their own way. Conditions are stronger in the EMU region as well as in Germany. But the composite PMIs are weaker in France, the U.K., Japan, and the U.S. However, for manufacturing, it's a different tune. Manufacturing improves in January in the EMU region, Germany, France, and the U.K.; it weakens only in Japan and the U.S.

Still, we're talking about month-to-month gyrations here. The historical averages show all regions weaker on average over three months compared to over six months and most regions are weaker on their six-month averages than on their 12-month averages. Japan’s headline composite and its service sector are the only exceptions. Year-over-year changes based on average data are different, with service sectors stronger in the EMU, France, the U.K., and Japan. Bolstered by service sector strength, the French composite is also stronger year-over-year. Japan’s composite is stronger year-over-year as well, and so is its manufacturing gauge.

Period to period changes Some of the month-to-month changes (second to last column on the right) are substantial with the German composite up by 4.6 points and the EMU composite up by 2.9 points. But in France, the composite is lower by 1.2 points, in the U.S. by 1.6 points, in Japan by one point, and the U.K. deteriorates by 0.4 points, month-to-month.

Over three months, the German composite is up by 5.6 points, the EMU composite is up by 3.1 points and the U.K. composite is up by 0.6 points, but the U.S. is lower by 1.6 points with Japan and France both lower by one point. These results indicate fewer uniform changes even over three months.

Standings in January The queue standings show all the observations in January, below their historic medians calculated back to January 2019 - except for Japan where services and the composite have relatively strong percentile rankings for the period. The U.S. and U.K. have the weakest composite standings on this period, in their respective 12th percentile and 14th percentile. France has a 24.5 percentile standing. Germany has a 28.6 percentile standing. The European Monetary Union has a 32.7 percentile standing. Manufacturing gauges for these regions range from a low percentile standing of 6.1% in the U.S. to a 38.8 percentile for the EMU and France.

The big picture… In the big picture, there's still a great deal of weakness in the highly developed country area, not only are the percentile standings low but most of the reports show declines for the composite and the manufacturing and in services indexes compared to the January 2020 levels, the levels that prevailed before COVID struck. The exceptions are that all three Japanese measures are somewhat higher than that level and in Germany manufacturing is now 1.7 points higher than it was in January 2020. All the rest of the gauges are lower on balance. That finding signals no growth and in fact a step back for most of these observations over a three-year span. Among the 18 PMI readings in January for the 3 sectors across six areas, only 6 (one-third of them) show PMI diffusion readings of 50% or higher – and no reading is even as high as 51%. It’s fair to say all reading are clustered around ‘unchanged’ or lower.

The whole world is watching… Markets are watching these trends closely because there's an anticipation that inflation is going to fall more quickly than expected by authorities and the central banks will be able to reverse tightening policies sooner- at least that's what seems to be getting into market pricing these days. The strengthening we see in January in Europe is suggestive of some economic resilience. But in the U.S. conditions have weakened across the board in December as well as in January and the U.S. percentile standings are the weakest among the developed group in each of the categories. While inflation has shown signs of coming off peak, that's not surprising compared to what was happening with inflation about a year ago. The question that remains unresolved is what kind of monthly inflation rates and ultimately what kind of inflation is going to be posted from here forward - not referring, in this case, to year-over-year changes but to whatever you think of when you think of true ongoing inflation calculated on the margin rather than something created by a favorable year-over-year comparison.

Summing up On balance, the January data continue to show weakness across these developed economies and the weakness is for the most part shared by the manufacturing and the services sectors. There is some stirring, some resilience in the month of January in Europe, but it's too soon to refer to that as anything more than a monthly blip. It will take time before we know whether there is any significant change afoot or whether this is just volatility. The queue and the range percentile standings continue to place most of these data in relatively weak portions of their profiles since 2019. Inflation is still running over target everywhere. Central banks are still trying to contain inflation rates that have run amok and that continue to run amok. And, as always the forecasts for the future are divided among optimists and pessimists and others with no clear psychological agenda. The future remains an open book. But, as things stand, (1) economies are weak, (2) inflation is too high and (3) central banks have much more work to do. That remains the same as it has been for some time.