3 Numbers To Watch: EU PMI, US Chicago Fed NAI, US PMI

Quite a lot of today’s market activity will be focused on digesting the implications of yesterday’s parliamentary elections in Germany. As my Saxo colleague Juhani Huopainen observed on Friday: "While it is practically certain that Angela Merkel will win another term as chancellor, the actual form of the next government is still an open issue." Monday is also a crucial day for developing early guidance on the Eurozone’s macro trend for September with the release of several flash estimates of purchasing managers indexes (PMIs). The main event for the big picture is the EU data, although that report will be preceded by the national PMI estimates for France (06:58 GMT) and then Germany (07:28 GMT). Later, two updates will provide deeper context for assessing the US business cycle: the Chicago Fed National Activity Index and the Manufacturing PMI.

EU Manufacturing & Services Purchasing Managers Index (07:58 GMT): Sentiment surveys within and across the Eurozone point to an economic recovery in the near-term future, but the hard data remains mixed at best. That’s not surprising: sentiment usually rebounds early relative to real economy in a period when the business cycle is at a major turning point for the better. But the EU’s recession has been no garden variety slump and so it’s unclear what to expect with a recovery from the mess that’s prevailed over the last several years. Given the deep structural challenges that remain, it’s reasonable to wonder if we’re truly at a positive turning point. Yes, the return to growth in the second-quarter GDP report for Europe suggests as much. But if the recession is history, the recovery is still a frail thing, as recent economic reports suggest. One example: car sales in the EU slumped in August, pushing the year-over-year comparison into the red by five percent, according to last week’s update from the European Auto Manufacturers’ Association. That includes losses in Germany, France and Italy. Among the major EU economies, only Britain posted a gain.

If sentiment in Europe continues to rise, however, it’s still reasonable to assume that better days are approaching. “The Eurozone recovery is looking increasingly broad-based, with more sectors and more countries emerging from recession,” says the chief economist at Markit Economics in the press release that accompanied the final August read on the Eurozone Composite PMI (pdf). Today’s flash estimates for September will be closely watched for signs that revival remains intact. In the August release, the manufacturing and services PMIs posted readings above the neutral 50 mark. Expectations are widespread that today’s numbers will continue to offer more encouragement for near-term outlook. Anything less would likely be greeted rather harshly. With the hard data still looking shaky, the market is in no mood for a negative surprise in today’s release.

US Chicago Fed National Activity Index (12:30 GMT): The Federal Reserve’s surprising decision last week to leave its stimulus program unchanged reflects the central bank’s cautious economic outlook. For example, the Fed’s new projection for GDP growth in 2014 dipped a bit to a 2.9 percent-to-3.1 percent range, which is down from June’s 3.0 percent-to-3.5 percent forecast. But if there’s room for doubt about the future path of the economy, the overall numbers to date still look encouraging for anticipating a moderate expansion.

Recent updates of the Chicago Fed National Activity Index, for instance, reflect a low level of recession risk. The three-month moving average of this benchmark (CFNAI-3MO), which is comprised of 85 indicators, ticked up a bit in the July release to minus 0.15 from minus 0.24 in the previous month. In other words, the economy continues to grow, albeit at a below-trend rate, as reflected in the marginally negative values of late. According to the Chicago Fed, a reading below minus 0.70 indicates an "increasing likelihood" of recession, and so by that standard the trend still looks encouraging if slightly sluggish. As for today’s update for August, I’m expecting CFNAI-3MO to inch higher, based on my econometric forecast for this index. It doesn’t hurt that my latest monthly profile of the US economy for August also suggests that we’ll see today’s number will more or less hold steady near the historical trend rate for growth.

US Manufacturing Purchasing Managers Index (12:58 GMT): Today’s flash release from Markit Economics offers an early look at the US macro picture for September. Based on recent data for this indicator and other reports, it would be surprising to see a big drop to the downside. Consider, for instance, last week’s encouraging news on industrial production for August: output rebounded handsomely, rising 0.4 percent versus the flat performance in the previous month. Even better, the year-over-year change turned substantially higher, advancing at a 2.7 percent annual pace—the strongest comparison since March.

The market will be keenly interested in learning if the September estimate of manufacturing activity will continue to track positive. On that note, consider that the rival ISM Manufacturing Index, which will be updated on October 1, is running at a considerably stronger pace in the August profile versus PMI. It will be interesting to see if today’s update moves closer to supporting the implied pickup in manufacturing activity vis-à-vis the ISM data. Yes, it will, according to the consensus forecast. Economists project that's today's PMI will post a modest increase to 54.0 versus 53.1 in August.