Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

EUROZONE COMPOSITE PMI REACHES 52.6

The eurozone enjoyed a positive start to 2015, as growth of economic activity accelerated for the second month running to its highest since July last year. Among the big-four nations, output expanded in Germany, Italy and Spain, but the downturn in the French economy extended into its ninth month.

At 52.6 in January, the final Markit Eurozone PMI® Composite Output Index was above its earlier flash estimate of 52.2 and broadly in line with its average for 2014 as a whole (52.7). The headline index has now signalled expansion for 19 months running. Output rose across the manufacturing and service sectors. The faster pace of growth was again recorded in services, although both sectors reported accelerations at the start of the year.

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Underlying the latest increase in economic output was a further gain in incoming new business. New order inflows rose sharply in Ireland (albeit at a slightly
slower pace than December) and Spain (six-month high). An increase was also signalled in Germany following declines in the prior two months. The trend
was near-stagnant in France and a contraction was seen in Italy for the fifth straight month.

Backlogs of work fell only slightly in January. With outstanding business showing signs of stabilising and new order growth accelerating, companies were
encouraged to take on more staff. This contributed to higher employment at manufacturers and service providers alike.

The rate of job creation rose to an 11-month high in Germany, an 88-month record in Spain and remained strong in Ireland (albeit the weakest increase since
October). Further job losses were registered in both France and Italy.

The effect of the recent slump in international oil prices was reflected in the trends for both input costs and output prices in January. Average costs fell for the first time in 20 months, as a slight increase at service providers (mainly due to higher wages and salaries) was more than offset by the steepest drop in manufacturers’ input prices for five-and-a-half years. Germany, France and Spain reported lower average costs, whereas Ireland and Italy saw increases.

January saw average selling prices fall at the quickest pace in nearly five years, with all of the big four nations signalling decreases.

The eurozone service sector saw the growth rate of business activity accelerate to a five-month high in January. At 52.7, up from 51.6 in December, the Eurozone Services Business Activity Index signalled that the current sequence of expansion now runs to one-and-a-half years. Business optimism also improved, hitting a ten-month high.

The upturn remained fastest in Ireland, where output growth stayed close to December’s six-month peak. Spain saw the fastest increase in activity since August last year, while growth in Germany improved to a three-month high.

Italy moved back into expansion territory with the third increase in output during the past four months, following a brief hiatus in December. In contrast, output in the French service sector moved in the opposite direction, falling for the fourth time in the past five months.

Underpinning the latest expansion in eurozone service sector output was a further increase in new business, with growth signalled in Germany, Spain, Ireland and France. Meanwhile, the trend in backlogs of work stabilised following a seven-month sequence of decline.

Job creation was registered in the service sector for the third straight month. Although the rate of increase was again only modest, it was still the fastest registered since July 2014.

The quickest jobs growth was signalled in Ireland, albeit slower than in December, while accelerations were seen in both Germany (six-month high) and Spain (nine-month high).

France and Italy both reported cuts to workforce numbers in January. The pace of job losses in Italy was the fastest since April last year, while the decline in France was the joint-weakest during the current 15-month sequence of reduction.

Input price inflation eased to a near-five year low in January, as signs of higher wages and salaries in pockets of the eurozone service sector were partly offset by the filtering through of lower oil prices to a number of other costs. Meanwhile, average service charges fell at one of the fastest rates during the past five years.

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JAPAN PMIs OFFER HOPE

January PMI data signalled a positive rise in overall business conditions in the Japanese service sector, with business activity rising at a sustained rate supported by a return to new business growth. Subsequently, backlogs of work accumulated, reversing the trend observed in the previous month. Meanwhile, employment remained in growth territory, albeit at a weak rate. Cost pressures persisted, with input prices rising, albeit at a slower rate.

The headline seasonally adjusted Business Activity Index posted at 51.3 in January, slightly down from 51.7 in December but nonetheless signalling a moderate increase in activity at Japanese services providers. Panellists commented on gains in new business from both the domestic and international markets. Furthermore, business activity has now risen for three successive surveys, marking the longest period of expansion in the past year.

Meanwhile, January data signalled a solid improvement in operating conditions in the Japanese manufacturing sector. The Composite Output Index posted at 51.7 in January, little changed from 51.9 in December and signalling a moderate rise in overall business activity.

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Higher activity was supported by a return to new orders growth at the start of 2015. Although moderate, the latest rate of expansion posted above the average since the sales tax increase was implemented last April. Meanwhile, new work at Japanese manufacturers rose for the eighth month running, with the rate of expansion ticking up from the previous survey period to a three-month high.

Pressure on capacity was evident at Japanese services companies in January, as backlogs of work accumulated alongside the return to new orders growth. In contrast, volumes of unfinished work at manufacturers were unchanged, following a previous two-month period of readings signaling declines.

Payroll numbers at Japanese services providers continued to rise, extending the current period of staff recruitment to seven months. Service sector firms linked the hiring of staff to improved business conditions. Employment growth remained weak, however, with the vast majority of panellists noting no change in comparison to the previous survey period. Meanwhile, manufacturers continued to hire staff, although at a slightly slower pace than the previous month.

Inflationary pressures persisted at Japanese services firms in January, as signalled by a rise in input prices. According to panellists, an increase in raw material and wage costs were the main drivers behind the rise in purchasing prices. However, the rate of inflation slowed to the weakest in just under a year-and-a-half. Meanwhile, selling prices increased as several Japanese services firms passed on higher cost burdens onto their clients. The rise in charges was fractional, however.

Price pressures were also felt in the manufacturing sector, as both input and output prices increased. Firms linked the inflationary pressures to the depreciation of the yen driving up raw material prices.

Finally, service sector expectations regarding future activity remained positive at the start of 2015, with the degree of sentiment little-changed from December. Firms linked optimism to the start up of new projects and an anticipated expansion in new business.