It’s been a rough start to the year. After all the early optimism on the US economy gaining momentum, Europe returning to growth and China hanging in there, some warning signals are starting to flash on the macro front.
The latest comes from the Chemicals Volume Proxy, developed by Paul Satchell, analyst with investment bank Canaccord Genuity. The leading indicator gauges volumes, and thus demand, through weekly changes in 33 spot chemical prices in the US, Europe and Asia, as assessed by ICIS.
“The Volume Proxy has continued to weaken after Lunar New Year (LNY). Following an unusually insipid start to 2014, we see this as a very bearish signal. Post-LNY weakness would typically mean that purchasers entered the holiday period with excess inventory, or that underlying demand is weak,” said Satchell. “Given the soft early January, we find the excess inventory argument improbable. On that basis, poor demand fundamentals look to be the more likely explanation.”
Looking forward, Satchell said “the bearish trend of our Volume Proxy so far in 2014 makes us increasingly nervous about the demand outlook over coming months”.
Regionally, Asia and Europe are heading the declines with readings of -6, and -5, respectively, while the US is hanging in there with a -1 reading, as of the week ended 17 February, making for an aggregate reading of -12. The readings, taken on a weekly basis, simply indicate the net direction of key chemical spot prices.
EUROZONE PMI CONTRAST
The negative level of Europe’s volume proxy lately is in stark contrast to the Markit Eurozone Purchasing Managers’ Index (PMI), which rose to 54.0 in January – the highest level since May 2011. For the PMI, a reading over 50 indicates expansion while under 50 indicates contraction.
Yet the Asia weakness is in line with the latest HSBC China Manufacturing PMI which fell to 49.5 in January – the first reading below 50 since July 2013. The US Manufacturing PMI was still positive at 51.3 in January but down sharply from 56.5 in December 2013.
Many view Europe as the key positive in the global market, with China and emerging markets growth weakening and the US hitting a speed bump. So this region bears watching closely. One positive is that if eurozone economic activity slows markedly or declines, and inflation continues to slow, the European Central Bank (ECB) has signalled it would step in with monetary easing measures.
And the Chemicals Volume Proxy, while definitely worth watching, is not an infallible leading indicator. To my knowledge, there is no such thing, and if I find one, I’m not telling!
The aggregate number was deeply negative in mid-late October 2013, and prior to that, through mid-March to late April 2013. No deep or lasting downturn occurred. However, the mid-March to late April 2013 period coincided with HSBC China PMI numbers under 50 and a decline in China stock prices.
So it’s prudent to be cautious at this point, and also keep an eye on the regional PMIs for signs of further deterioration.