We had a common theme through the manufacturing data put out by our major economies - the US, Europe/Germany, UK, and China. Manufacturing hums along, picking up to a 6-year high in the US, a 9-month high in Europe, and a survey-high in the UK. At the same time input prices in the manufacturing prices are surging. This should mean some increased volatility in markets as we start pricing in which central banks will act more aggressively to combat the inflation threat.
UK Manufacturing PMI Surges, A Bright Spot in UK Economy
The GBP extended its gains from yesterday, breaking above 1.60 overnight, and reaching a high 1.6143 following the release of its manufacturing PMI for January. The index rose to 62 from 58.7 from December, and its the best reading since the survey started in 1992. There was a strong focus on the input prices index which climbed to 84.9. We know that inflation pressures are a big concern for the Bank of England and market participants are pricing in a BOE that may be pressured into tightening conditions.
From Financial Times: Survey shows surge in UK Manufacturing
Output from Britain's manufacturing sector surged to a record high in January, according to a closely watched survey, with readings for new orders showing a particularly sharp rise...
Input prices rose to 84.9 - any reading over 50 indicates that the sub-category of the PMI is growing - from readings of 80.3 and 73.8 in December and November respectively.
Moreover, the employment sub-category of the index rose to 58.8 from 57.8, a bright spot in an economy that is hoping for the creation of new private sector jobs at a time when large-scale public sector redundancies are expected.
Euro-Zone Manufacturing Hits 9 Month High
In the Euro-zone the economic data has been strong of late, as Germany powers forward, and there is strong demand for European exports. The Manufacturing PMI climbed to 57.3 in January from 57.1 in December, but it was also stronger than the preliminary reading of 56.9.
From the Wall Street Journal - Euro-Zone Manufacturing Picks Up
There were also signs that national divergences may be narrowing as Italy's manufacturing sector grew at the fastest pace since June 2006 and Ireland posted the strongest manufacturing reading since last April.
This is being largely driven by external demand, with exports excluding those from France and Germany rising at the fastest pace since April 2000, said Chris Williamson, chief economist at Markit. However, evidence suggests that domestic demand continues to act as a strong drag on growth in many countries, notably in Spain and Greece.
Here too the focus was keenly on inflation gauges.
Markit said manufacturing input costs rose at the fastest pace in the survey's history in January. Producer output-price inflation also reached a two-and-a-half-year high, a sign that companies are managing to pass on some of the higher costs to consumers.
That is likely to be of keen interest to the European Central Bank as it prepares to set interest rates at its regular policy meeting on Thursday. ECB President Jean-Claude Trichet said last week the level of interest rates remains appropriate, but he has also said the central bank will do what is necessary to ensure price stability.
We'll be hearing from the ECB on Thursday.
Both the UK and Euro-zone data helped to spur risk appetite during the overnight trading session and that has powered gained for the both the EUR and GBP against the USD. In general risk appetite was stronger today, despite the unrest in Egypt.
US ISM Manufacturing Index Hits 6-Year High
In the US, the ISM Manufacturing Index rose to 60.8 in January from an upwardly revised 58.5 in December. And like we saw in the UK and Euro-zone data, prices jumped more than expected. The prices paid component rose to 81.5 from 72.5 in December. If inflation starts to filter through to consumers which leads to higher wage demands, we may finally see the underlying trend of inflation start to pick up in the US. So far, we can say that the underlying trend may be bottoming.
From CNNMoney: Manufacturing Revs Up in January
The manufacturing sector started off 2011 with a bang, growing at its fastest pace in more than six years, a purchasing managers' group said Tuesday. While January's index is at the strongest level since May 2004, one of its components could foreshadow inflation as a threat to the economy down the road. The ISM Prices Index, which measures the cost of raw materials used in the manufacturing process, surged ahead to 81.5, up from 72.5 in December.
The news helped the USD against other lower-yielders like the JPY and CHF, but in general such a release should help fuel risk appetite and stock gains and may actually contribute to investors seeking higher returns abroad and demand at the expense of the safe-haven USD.
Chinese Manufacturing Mixed
Chinese data showed the manufacturing sector expanding, as both the official government report and a private HSBC reading both stayed above the 50 level separating growth from contraction. Firstly, the official China Federation of Logistics and Purchasing (CFLP) said its purchasing managers index (PMI) dipped to 52.9 in January, from 53.9 the previous month. Secondly, the HSBC China Manufacturing PMI edged higher to 54.5 in January, from 54.4 in December.
From International Business Times: China's manufacturing activity slows to five-month low in Jan
China's manufacturing activity contracted to a five-month low in January, indicating that the Chinese government measures to control prices caused a decline in manufacturing.
China's manufacturing sector purchasing managers index (PMI) fell to 52.9 percent in January, compared with 53.9 percent in December, the China Federation of Logistics and Purchasing (CFLP) said on Tuesday. Analysts polled by Reuters had forecast manufacturing PMI to decrease slightly to 53.5 in January.
Analysts said that Chinese government measures to contain the rising prices led to a decline in manufacturing activity in January. However, the index showing the input prices rose to 69.3 in January compared with 66.7 a month earlier, prompting further tightening measures from the government to check inflation.
So, there's the common theme throughout all of our major economies - the US, Europe/Germany, UK, and China. Manufacturing hums along as demand pick-up amidst the global recovery, but inflation pressures are building. This should mean some increased volatility in markets as we start pricing in which central banks will act more aggressively to combat the inflation threat.
Aussie Manufacturing Sector Continues Contraction
From Bloomberg: Australian Manufacturing Contracted for Fifth Month in January
Australian manufacturing contracted in January for a fifth straight month as measures of inventories, wages and supplier deliveries declined, a private survey showed.
The manufacturing index was 46.7, compared with 46.3 in December, the Australian Industry Group and PricewaterhouseCoopers said in a survey released in Canberra today. A number below 50 indicates contraction. Capacity utilization rose to 73.9 percent from 72.3 percent a month earlier, it showed.
The nation's factories are lagging behind the mining industry, which is expanding to meet Chinese demand for raw materials and pushing the job market near a level the government views as full employment. The Australian currency's 12 percent against the U.S. dollar in the past year has hurt export competitiveness.