Markets slumped today on the back of a poor American jobs report and renewed concerns over Europe after PMIs from the euro zone came in lighter than expected.
PMIs from across Europe came out this week, and they weren’t good. Throughout the euro zone, not just in the southern periphery, manufacturing output is declining. This includes countries like France and Germany. Germany’s PMI was particularly worrisome, coming in at a 33-month low of 46., indicating a contraction in manufacturing. As the author argues, “(w)hat is most frightening about the euro-area picture is that this is not happening. For now, austerity remains the rule.” Until emphasis on growth and austerity is emphasized, particularly from the Germans, the crisis does not look likely to subside.
While Ireland (IRL, quote) and its sagging housing market have seemingly turned a corner, moving towards a recovery, Spain (EWP, quote) and its burst bubble have yet to begin the healing process. The authors argue that this is partially due to the fact that Ireland embraced the failed bank model that, while resulting in short-term pain, has allowed Ireland to move forward and potentially beyond its housing crisis. Conversely, Spain has not implemented the necessary reforms which has seen its economy wallow over the past few years. As a result, the country is on the verge of more credit downgrades and dealing with a housing bubble that has not fully played out yet. Until Spain shows signs of improvement – and this week’s 34-month low PMI was not that, investors should continue to avoid the country from the long side.
The unemployment rate in Germany unexpectedly rose by 19,000 filings, compared to a predicted decrease of 10,000. While the unemployment rate remained stable at 6.8%, economists believe that this indicates a stabilization in the unemployment rate that could be affected going forward if output and euro zone demand continue to shrink, as the unemployment rate is a lagging indicator. While this in and of itself is not sufficient reason to sell off Germany (EWG, quote), traders should be cognizant of, along with the most recent PMI, these potential signs of weakness in the Germany economy.
In spite of the seemingly constant deluge of negative economic data stemming from the euro zone, some countries on the outside still want in. Latvia’s government has spent the better part of a decade trying to qualify to join Europe’s elite. Another hurdle towards their accession was cleared this week as S&P upgraded the nation’s sovereign credit rating to investment grade. While the decision to join the euro zone remains unpopular amongst its citizenry, joining the euro zone will improve Latvia’s external credit facilities, although it will limit currency flexibility.
India’s Purchasing Managers’ Index increased month over month for the month of April, growing to 54.9, compared to 54.7 the month before. India’s PMI growth is surprising because of both the economic climate in the euro zone, but also the macroeconomic headwinds facing the Indian economy (EPI, quote) itself. While this is not reason to jump into India at this point, it does show that there is potential for moderate growth in spite of political stagnation.