G3 Recap 3-1-11

Main Items:

  • ISM Manufacturing improved to 61.4 in Feb vs 60.8 in Jan vs 60.0 expected. This was the highest print since 2004. The details were strong – the employment index improved to 64.5, the highest reading since 1973, and there was also a marginal improvement in New Orders to 68. The Inventories index actually declined to 48.8.
  • BoC kept policy rates unchanged as expected. “The recovery in Canada is proceeding slightly faster than expected” but “inflation in Canada has been consistent with the Bank’s expectations.”
  • RBA kept policy rates unchanged. “the Bank expects that inflation over the year ahead will continue to be consistent with the 2–3 per cent target.”
  • BMW CEO sees BMW Group February unit sales up more than 20%. Audi says it is heading for a record quarter as February sales advance 20%.
  • China owns ~250bn more treasuries than previously estimated, about 30% higher than the US Treasury estimate 2 weeks ago – BBG

Overseas Data:

  • Chinese PMI Manufacturing declined to 52.2 in Feb vs 51.1 expected and 52.9 previously. The HSBC measure declined to 51.7 vs 52.5 expected and 54.5 previously
  • EU CPI was unchanged at 2.4% YoY in Feb as expected.
  • EU UE declined to 9.9% in Jan vs 10.0% expected and previously.
  • German UE fell -52k in Feb, vs -18k expected.
  • UK PMI Manufacturing declined to 61.5 vs 61.0 expected and 62.0 previously.
  • Italian PMI Manufacturing improved to 59 in Feb vs 57.3 expected and 56.6 previously
  • Australia PMI Manufacturing improved to 51.1 in Feb vs 46.7 previously


  • The first-day-of-the-month effect is out of the bag. WSJ reported on it this morning. Of course, this meant that the strategy didn’t work today. However, the fact that this positive seasonal effect in conjunction with a very good ISM print resulted in a sharp risk off move bears closer scrutiny.

    The larger reason appears to be a growth scare as a result of this jump in commodities. Most brokers so far have remained fairly sanguine and the impact to growth, but that view appears to be already priced in. For example, Goldman estimates (US Economics Analyst, 2/25) that a 10% rise in oil prices reduces real GDP by 20bps per year over 2 years, but notes that their forecast of 3.7% growth already takes into account oil prices of $120 @ YE2012.

    But we are not so far from that level. Front month WTI crude is flirting with $100, and has increased 46% since last June, a 62% annualized pace.
    Consensus forecasts for 2011 US growth is 3.2%. Assuming trend growth of 2.5%, and assuming Goldman’s estimates of oil’s impact on GDP holds, to reduce real GDP to trend growth, oil will need to increase just 10% * (3.2-2.5) / 0.2 = 35%. This means that we could get to that point by mid-year if oil prices continue to rise at their current pace. (Note again that oil prices need to continue to increase – if it stabilizes, things will be OK) Based on recently Fed rhetoric, if we get to that point, the improvement in US employment will cease and the Fed is likely to start considering QE3.

    Of course, that is a big IF. But it is a scenario that is easy to imagine and the market looks scared enough to be ready to price in. That fact that everyone + their mom were bullish equities does not help. Time to batten the hatches.