After the markets get shaken around by major economic events such as the four largest central banks holding meetings, there is one final major risk event before the weekend. The flash PMIs generally don’t affect one currency in particular as much as shift global sentiment. If they are broadly seen outperforming, then the market could take on a more positive view of risk. But a disappointment could push markets back down in line with the theme that September is a risk-off month.
The main theme is that so far economic data has been largely ambivalent. There has been both good and bad news, often mixed together, from the world’s largest economies. This has created increased uncertainty about where risk appetite is headed. Since PMIs represent the fastest data, they are often key drivers of initial market trends. Friday’s Flash PMIs are the first look at what to expect from September data.
Dollar, gold and commodity currencies
There has been a series of positive developments for the markets recently. But that is only because we’re in something of a “bad news is good news” situation, with highly involved central banks. Bad news for the economy is good for the markets, because it means less tightening from central banks, generally speaking.
The Fed’s pause, and the ECB essentially announcing that it has reached peak rates, have contributed to a general sense of relief in equity markets. That has put pressure on gold, and supported commodity currencies. The barrage of positive data from China after it managed to skirt its latest housing crisis has been particularly good for the Australian Dollar. But that optimism is rather tentative, and can be easily shaken up by disappointing PMIs.
Limited upside
The problem is that most major economies have PMIs in contraction, which signals that the economy is slowing down if not heading for a recession. In many cases, it would require a major surprise above consensus to push back into expansion. That makes a major break to the upside relatively unlikely.
But with most PMIs already in contraction and budding optimism, it doesn’t take all that much of a disappointment to push markets into pessimism. Particularly ahead of a weekend in which there are a lot of lingering effects from rate decisions to process.
What to look out for
After the EU Commission and the ECB both cut the economic outlook for Europe, there is likely to be a lot of focus on Germany and the Eurozone. With Germany expected to fall back into recession this year, the “sick man of Europe” narrative about the largest economy has resurfaced. German composite PMI is forecast to actually decline slightly to 44.5 from 44.6. The measure for the whole EuroZone economy is expected to also fall to 46.3 from 46.7.
After the latest move by the BOE, there is increasing focus on whether the UK economy will slip into contraction by the end of the year. So Composite PMI falling to 48.1 from 48.6, as is currently forecast, would likely not reassure investors.
The US is expected to remain the odd one out by staying just barely in expansion with a composite PMI of 50.2 compared to 50.1 prior. But that is thanks to a divergence between services and manufacturing, with consumer spending outweighing continued decline in the industrial sector.
