Why the EM meltdown doesn’t change my positive macro view

Today’s commentary

Summary: I am alarmed at how quickly economic and market volatility has spread throughout the emerging markets. However, I remain positive about the big picture global macro outlook because recent data show that Europe, the US and now China are still keeping the economic recovery on track.

Yesterday’s commentary on the emerging markets was downbeat because of my alarm at how quickly the situation seems to be deteriorating across such a large swathe of seemingly unrelated economies and markets. From Russia to Brazil to Mexico to Indonesia to India to Turkey, we are seeing major market volatility and declining growth or outright economic contraction. It is the breadth of the downdraft and the fact that it is both a real economy and market phenomenon that is troubling. I am concerned that this could develop into a crisis. That said, the macro picture today does not look anywhere near as unstable as it did in 1997, when we had the Asian crisis. We can take some solace from this.

Moreover, from a global macro perspective things are actually looking positive. The contrast between my post yesterday and my global macro view from two weeks ago owes to the fact that economies are on the mend outside of the EM space. Recent PMI data confirm this. Overnight and this morning we saw positive PMI data in China, the US and Europe and positive sentiment data in Japan. Below are the summaries.

• Japan manufacturers’ optimism hits three-year high: Reuters Tankan | Reuters: “The index of sentiment derived from a monthly Reuters survey of manufacturers rose by 3 points to plus 16 in August, which matched the level it was at in November 2010. A positive readings shows optimists outnumbered pessimists. The index is expected to rise again to plus 18 in November in the Reuters survey, which is strongly correlated with a closely watched quarterly Bank of Japan tankan survey.”
• China Manufacturing Expands – WSJ.com: “The initial reading on the HSBC Purchasing Managers’ Index climbed to 50.1 from 47.7 in July, when it was at an 11-month low. A reading above 50 indicates expansion from the previous month, while a reading below 50 indicates contraction. Following evidence of stronger growth in industrial output and exports in July, the latest data suggest China’s economy may have bottomed out in the second quarter, with slightly brighter prospects for the second half of the year. “
• U.S. Manufacturing recovery gains momentum as order growth hits seven – month high – Markit (pdf): “Key points: PMI rises to five – month high, signalling moderate growth of manufacturing sector. New orders increase strongly. Employment rises for second month running. Input price inflation slows. The Markit Flash U.S. Manufacturing Purchasing Managers’ Index ™ ( PMI ™ ) 1 signalled the strongest improvement in manufacturing business conditions in five months during August. The flash PMI index, which is based on approximately 85% of usual monthly replies, was up slightly from July’s 53.7 to 53.9, and suggested a moderate expansion of the manufacturing sector.”
• Eurozone recovery gains momentum with fastest growth for over two years – Markit (pdf): “Flash Eurozone PMI Composite Output In dex (1) at 51.7 ( 50.5 in July ). 26 – month high. Flash Eurozone Services PMI Activity Index (2) at 51.0 ( 49.8 in July ). 24 – month high. Flash Eurozone Manufacturing PMI (3) at 51.3 ( 50.3 in July ). 26 – month high .  Flash Eurozone Manufacturing PMI Output Index (4) at 53.4 ( 52.3 in July ). 27-month high . The Markit Eurozone PMI ® Composite Output Index signalled the largest monthly increase in business activity for over two years in August, according to the flash estimate. The PMI rose fo r the fifth successive month, up from 50.5 in July to 51.7, the highest since June 2011. The above – 50 readings signal two consecutive months of rising output, in contrast to declining business levels over the prior 17 months.”

These data points support my contention that the global economic expansion has broad-based momentum at the moment. Europe is moving out of recession, Japan and the U.S. are expanding as well and China’s economic growth slowdown has been arrested for now. I believe the trend now in place will carry us through the rest of 2013 in a positive direction despite the turmoil in EM.