Recap 7-2-12

Main Items:

  • US ISM declined to 49.7 vs 52 exp and 53.5 prev. This was the weakest print since July 2009. New orders had reached their highest level in 13 months in the May data, but fell to its lowest level in 37 months in June
  • US Markit PMI declined to 52.5 vs a preliminary print of 52.9


  • Italian Mfg PMI declined to 44.6 in June as exp vs 44.8 prev
  • UK Mfg PMI jumped to 48.6 in June vs 46.5 exp and 45.9 prev
  • Swiss Mfg PMI improved to 48.1 in June vs 45 exp and 45.4 prev
  • EU Unemployment ticked higher to 11.1% in May as exp vs 11.0% prev


  • China Mfg PMI declined to 50.2 in June vs 49.9 exp and 50.4 prev. The HSBC measure declined to 48.2 vs 48.4 prev
  • Australia Mfg PMI improved to 47.2 in June vs 42.4 prev
  • South Korea HSBC Mfg PMI declined to 49.4 vs 51 prev
  • Vice Premier Li Keqiang said China must keep its property curbs in place despite signs of slowing overall economic growth – Reuters

Upcoming Data:

  • Mon: China Non-Mfg PMI
  • Tues: RBA, Australia Services PMI, China HSBC Services PMI
  • Wed: US Holiday, Italy Services PMI, UK Services PMI
  • Thurs: BoE, ECB, US ADP Employment, Jobless Claims, ISM Non-Mfg,
  • Fri: Swiss CPI, UKPPI, US Payrolls, Unemployment, Canada Unemployment

Commentary & Links:

The ISM figure today, along with the other macro prints we’ve seen over the past month, is consistent with an annualized mid-single digit EPS growth for the S&P. With profit margins near their peaks, substantial increases in equity prices going forward will be necessarily driven by substantial P/E expansion.

Model outputs suggest that trailing P/E is unlikely to increase much above 14. Current trailing SPX 12m EPS is 99, with consensus expectations of an increase to 104 at the end of the fiscal year, which appears broadly justified. Against a 14 multiple, this suggests 1450 as a possible high.

Since the S&P remains well off of these levels, a large short position is unjustified at these levels, despite the deteriorating data. This is the main reason why the 3Q Outlook espoused long fixed income trades as the way to play the slowdown rather than short equities. However, a substantial continuation of the risk rally from last Friday above 1400 is likely to be an excellent opportunity for such a trade.