Italy stands out as a weak spot in yesterday’s bullish PMI and ISM data

There was a slew of PMI data released yesterday. And the ISM released it’s manufacturing numbers for the US as well. Almost all of the data were bullish and supports the idea that this economic expansion has legs for the rest of 2018 and beyond.

What about Italy though?

If we’re looking at the developed economies, Italy is the weakest link right now. And unfortunately, the PMI there was weak, the worst in two years and near the 50 recessionary mark.

Italy PMI September 2018.png

Source: Bloomberg

Now, under normal circumstances, one would expect a government with this kind of weakness to try and add monetary or fiscal stimulus to boost demand. And indeed, with monetary stimulus already maxed out, the Italian government has talked of adding some stimulus to increase demand. But these initiatives fall afoul of the EU’s stability and growth pact.

The result has been unease within EU policy circles and an increase in Italian yields and Italian CDS.

The EU’s Dombrovskis was quoted as saying that their initial assessment of the Italian budget was that it is not compatible with the stability and growth pact. Even the French have warned the Italians about flouting the rules, despite France’s history of missing their own targets.

Yesterday, It was another rough day in the Italian bond market, with the ten-year yield climbing to 3.3%, the highest level since 2014.

Italy 10-year yield.png

Source: Bloomberg

In some ways, you can see why many in the UK are keen to escape the EU. But, of course, the UK has its own currency and Italy does not. This makes the budget problems existential.

European markets are lower today as Italian Banks are being heavily pressured, with the sector falling to 19-month lows. While ratings agency Moody’s has played down Italian risk to the eurozone, Goldman Sachs has said that it sees Italy junk risk leading to a ‘sudden stop’ of capital, almost like an emerging market. This is what you hear about Turkey.

I am not that concerned yet. But we do need to watch this situation for tail risk.

Elsewhere it looks mostly good

If you look at the numbers elsewhere though, the expansion continues apace, even in the UK, despite Brexit angst. The UK manufacturing PMI rose to 53.8 in September, buoyed by domestic demand. And future optimism picked up in the UK as well. Export orders stabilized after a steep fall in August.

The Dutch, in particular, looked good. The manufacturing PMI improved to 59.8 in September, compared with 53.3 for the euro zone as a whole.

The US manufacturing PMI rose to 55.6 in Sept versus 54.7 for Aug. That’s a four-month high. Having said that, the Q3 average for the US is the weakest since Q4 2017. Don’t worry though, the GDPNow figure for the now ended third quarter is still at 4.1%. And the most recent manufacturing ISM was a very robust 59.8.

US ISM September 2018.png

One other weak spot to note was Japan. The final PMI reading was comfortably above the 50-point recessionary line at 52.5. But Japan’s manufacturing sector grew less in September than previously thought, with the final reading showing business optimism about future output falling to a 22-month low.

Overall, the numbers look good though. They support a view that this global expansion has legs through 2018 and well into 2019.

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