Bimb Research Highlights

Author: kltrader   |   Latest post: Mon, 13 Jan 2020, 5:44 PM


Economics - Global Manufacturing Shows Sign of Recovering

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  • Malaysia’s manufacturing PMI hits 14-month high in November
  • Global manufacturing PMI edges back into expansion territory
  • US manufacturing sector slumps further in November
  • Eurozone manufacturing still a major drag on the economy
  • UK manufacturing contracts as political and economic uncertainty continues
  • China’s manufacturing sector accelerates in November
  • Japan’s manufacturing sector remains firmly stuck in contraction
  • ASEAN manufacturing continue to deteriorate in November

Malaysia’s manufacturing PMI hits 14-month high in November

Malaysia's manufacturing sector continued to show signs of the goods-producing economy moving along an upward trajectory in November. The IHS Markit manufacturing PMI rose for a third successive month to reach a 14-month high of 49.5 in November, a marginal rise from 49.3 in October, but the highest reading since September 2018 and above its historical average. Still, the latest reading pointed to the 14th straight month of contraction in the sector. The principal driver behind the rise was an increase in new export orders for the first time in four months. Order books are benefiting from renewed export growth fuelled by improving global trade flows and an easing in global trade tensions, with the respective new business index rising for a third straight month to hit a 14-month high. Meanwhile, employment levels were held steady and the survey's output index continued to run close to October's one-year high. At the same time, input prices rose at only a fractional pace in November, which firms primary attributed to currency weakness. As, a result, firms kept their output charges unchanged from the prior month. Business optimism also remained markedly higher than a year ago.

Outlook. The IHS Markit Malaysia manufacturing PMI increased from 49.3 in October to 49.5 in November. Albeit improving, the index has been below the 50-point demarcation line for 14 months consecutively since October last year, indicating weaker business sentiment among the manufacturers resulting from protracted period of softer demand. The headline PMI, which measures overall business conditions, has now risen for three successive months to reach its highest for over a year, and the survey’s production gauge has continued to rise from the low seen at mid-year. Given the latest manufacturing PMI figure, both the headline PMI and the survey’s output gauge are now running at levels indicative of GDP and manufacturing production growing at annual rates above 5.0%. The PMI increased brought further signs of manufacturing growth picking up momentum and it gives confidence to continued sustainable growth for the country. On the other hand, the trade war and an electronics down-cycle continued to weigh down on export and industrial performance. We remain cautious on the outlook over the next few months with leading indicators still pointing to subdued external demand and slowing global growth. Although the US and China are expected to sign a “Phase 1” trade deal, there is still a long way towards full resolution.

Global manufacturing PMI edges back into expansion territory

Global manufacturing showed tentative signs of recovery in November. The J.P.Morgan Global Manufacturing PMI posted a seven-month high of 50.3 in November, moving back above the 50.0-line dividing expansion from contraction for the first time since April. That said, the level of the PMI is consistent with only a slight improvement in overall operating performance. The recovery was centred on the consumed goods sector. The Consumer Goods PMI rose to a four-month high following accelerated growth of both output and new orders. In contrast, PMI readings for the intermediate and investment goods industries both signalled contractions.

Eleven of the nations for which November PMI data were available registered expansions, with the strongest growth signalled for Greece, Colombia and Brazil. The US, China and France were also among the nations seeing an improvement. Germany and the Czech Republic remained at the bottom of the growth rankings.

Overall, November saw further signs of recovery in the global manufacturing sector. The headline PMI moved back into expansion territory for the first time since April, as output growth picked up and new orders posted an additional increase. The Employment PMI bounced back suggesting possible stabilization in employment growth. The sector should hopefully build on this platform heading into the new year.

US manufacturing sector slumps further in November

Manufacturing activity continued to lag in November amid a decline in inventories and new orders, according to the latest ISM manufacturing PMI. On the other hand, the Markit manufacturing PMI indicated expansion.

The Institute for Supply Management (ISM) reported that the manufacturing PMI sank to 48.1 in November from 48.3 in October. Orders have not been below this level since April 2009. New orders slumped to 47.2, down 1.9 percentage points from October’s 49.1. Inventories, which are a key input for gross domestic product, came in at 45.5, down 3.4 points from the previous month. Employment was at 46.6, down 1.1 point for the month, while export orders fell 2.5 points to 47.9 as the U.S. and China continue to look for a resolution to a trade dispute that began more than a year and a half ago. Supplier deliveries was one of the few metrics in expansion, rising 2.5 points to 52.

Meanwhile, IHS Markit manufacturing PMI posted 52.6 in November, up from 51.3 in October, to signal the strongest improvement in the health of the manufacturing sector since April. However, the reading remained below the long-run series trend and indicative of only a modest upturn overall. A third consecutive monthly rise in the PMI indicates that US manufacturing continues to pull out of its soft patch. New orders and production are rising at the fastest rates since January, encouraging increasing numbers of firms to take on more workers. Exports are also back on a rising trend, firms are buying more inputs and re-building inventories, adding to the signs of improvement. Some caution is needed, as these improved survey numbers merely translate into very subdued growth in comparable official gauges of manufacturing production and factory payrolls. Business sentiment also remains worryingly subdued, with expectations about future output growth well down on earlier in the year and running at one of the lowest levels seen since comparable data were first available in 2012.

The continuing contraction in the ISM manufacturing PMI showed the weak export growth and caution among business leaders is hitting the manufacturing sector hard. There had been hope that manufacturing was stabilizing, but November’s data throw that theory into questions. In short, November ISM manufacturing PMI is a soft report, and the fall in orders, if sustained, suggests the headline index could dip a bit further in December. A charitable interpretation is that the ISM is bouncing along the bottom. We would be surprised to see a further significant decline, but the sector is stuck in a mild recession with little prospect of a real near-term revival

Eurozone manufacturing still a major drag on the economy

November saw the continued contraction of the euro area manufacturing economy, albeit at the slowest rate for three months. The IHS Markit Eurozone manufacturing PMI improved to 46.9 in November, compared to October’s 45.9. Whilst a relative improvement, the PMI nonetheless remained well below the crucial 50.0 no-change mark and extended the current period of contraction to ten months. At the market groups level, both the intermediate and investment goods sectors remained inside contraction territory during November, although in each case rates of decline were weaker. Operating conditions for consumer goods producers were unchanged compared to October. Ongoing declines in output and new orders were again recorded. For production, the rate of contraction was however the slowest in three months, whilst new work recorded its mildest fall since June. According to Markit, a further steep drop in manufacturing output in November means the goods-producing sector is likely to have acted as a major drag on the eurozone economy again in the closing quarter of 2019. The survey data for the fourth quarter so far are indicating a quarterly rate of contraction in excess of 1% for manufacturing. Of the eight countries covered by the survey, only Greece and France posted manufacturing expansion on a month-on-month basis in November. Germany remained bottom of the table, despite recording its best PMI reading in five months. Austria and Spain were the next worst performing, but similarly recorded weaker rates of contraction, whilst Italy registered its lowest PMI print for eight months. Marginal contractions were seen in Ireland and the Netherlands, although the latter registered a first contraction since June 2013.

UK manufacturing contracts as political and economic uncertainty continues

The UK manufacturing downturn continued in November, as businesses responded to the delay to Brexit and a fresh injection of uncertainty from the forthcoming general election. The IHS Markit/CIPS PMI slipped to 48.9 in November, down 49.6 in October. The PMI has remained below the neutral mark of 50.0 for seven successive months. Downturns in output and new orders continued amid a renewed contraction in exports. The pace of job losses also hit a seven-year high as firms sought to reduce overheads in the face of falling sales. Destocking at manufacturers and their clients following the latest Brexit delay was a major contributor to the weakness experienced by the sector. Inflationary pressures meanwhile showed signs of moderating further, with input costs falling slightly for the first time since March 2016.

China’s manufacturing sector accelerates in November

The manufacturing sector in China continued to expand in November, and at a faster pace. Both the official and the Caixin/Markit manufacturing PMI came in stronger than expected.

China’s official PMIs for November re-entered the expansion zone, ending month-on-month contraction reported in the previous six months in a row. The official PMI released by National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) rose to 50.2 in November of 2019 from 49.3 in the previous month. This marked the first expansion in factory activity since April, as output increased the most in eight months (Sep: 52.6; Oct: 50.8), signalling faster expansion, while both new orders (Nov: 51.3; Oct: 49.6) and buying activity (Nov: 51.0; Oct: 49.8) returned to growth. Improvements were seen in both the supply side and demand side, with both indices at their highest level since the second half of the year. Imports and exports were improving in November as the NBS data showed the sub-index for new export orders gained 1.8 points to 48.8 (Oct: 47.0), while the index for imports climbed 2.9 points to 49.8. On the price front, input price dropped for the first time in three months (Nov: 49.0; Oct: 50.4) and selling prices decreased for the seventh month in a row and at a steeper rate (Nov: 47.3; Oct: 48.0). Looking ahead, sentiment strengthened to a seven-month high (54.9 vs 54.2).

Meanwhile, Caixin survey also signalled a further modest improvement in the health of China’s manufacturing sector during November. The Caixin/IHS Markit manufacturing PMI edged up from 51.7 in October to 51.8 in November, to signal an improvement in overall operating conditions for the fourth successive month. Though modest, the pace of improvement was the strongest since December 2016. New business rose strongly, which underpinned a further solid increase in production. Notably, new export orders saw the first back-to-back monthly rise for over a year-and-a-half. Staffing levels were broadly stable following a seven-month sequence of decline, but capacity pressures persisted, with backlogs of work expanding again. Average input costs meanwhile rose marginally, while factory gate charges fell slightly amid reports of a general drop in market prices. However, despite further increases in output and new orders, the level of positive sentiment towards the 12-month outlook for production slipped to a five-month low in November.

The official PMI survey typically polls a large proportion of big businesses and state-owned enterprises. The Caixin indicator features a bigger mix of small- and medium-sized firms. The synchronized improvement in the survey data does point toward some uptick in growth last month. The data come as US. and China remained locked in a long-drawn trade dispute that has weighed on sentiment. Business confidence remained subdued, as concerns about policies and market conditions persisted, and their willingness to replenish stocks remained limited. This is a major constraint on economic recovery, which requires continuous policy support. Investors around the world have been eagerly awaiting the signing of a trade agreement since Trump said in October that the US had come to a “very substantial phase one deal” with China. If trade negotiations between China and the US can progress in the next phase and business confidence can be repaired effectively, manufacturing production and investment is likely to see an improvement.

Japan’s manufacturing sector remains firmly stuck in contraction

The Japanese manufacturing sector remained stuck in a downturn midway through the fourth quarter as the headline Jibun Bank Japan manufacturing PMI remained below the 50.0 no-change mark in November for a seventh straight month, posting 48.9 but up slightly from 48.4 in October. 

Latest survey data pointed to lower output volumes across the Japanese manufacturing sector. Although the decrease was softer than in October, it was broadly equal to the average seen across the current 11-month contraction period. Weak demand was the key factor driving production cutbacks. New orders remained in contraction and the decrease was the second-fastest since mid-2016, outpaced only by that seen in the previous month. Export orders dropped at the fastest rate since mid-year amid reports of demand weakness at key trade destinations, namely China. At the sub-sectors, it was intermediate and investment goods which were the primary sources of economic decline, whereas consumer goods makers observed improvements in business conditions.

ASEAN manufacturing continue to deteriorate in November

The ASEAN manufacturing PMI rose from 48.5 in October to 49.2 in November, signalling a sixth consecutive deterioration in the health of the ASEAN manufacturing sector, albeit one that was only marginal. Overall, the latest survey data highlighted continued weakness of the ASEAN manufacturing sector. Further reductions in both output and new orders underpinned the deterioration, although the rate of contraction eased in both cases. In contrast, new business from abroad fell at a faster pace, although the decline remained marginal overall. Weak client demand remains a primary concern, and despite signs of the downturn easing in November, order intakes will need to pick up soon to increase the likelihood of a recovery soon. Nonetheless, ASEAN manufacturers were optimistic that output would rise over the next 12 months in November. The level of positive sentiment strengthened to the highest since June.

Country-level data highlighted Myanmar as the best performing of the seven monitored countries, as has been the case in each of the last ten months. The headline index of 52.7 indicated a solid improvement in operating conditions and extended the current sequence of growth to 13 months. This was down slightly from October's 53.0 but still comfortably above its long-run average of 51.1. Manufacturing in Myanmar looks set to end the year with solid underlying growth, with the overall rate of expansion in November keeping pace with the strong 2019 trend. The PMI is averaging 52.8 in 2019. The Philippines also reported an improvement, although moderate, with the IHS Markit Philippines manufacturing PMI of 51.4, the lowest since July amid softening growth of output and new orders. The output index fell to its weakest since April and indicated a loss of growth momentum at manufacturing firms. The overall uplift in production was modest and often attributed by firms to higher new orders.

Vietnam was the only other country to report an uptick in the health of the manufacturing sector in November. The Vietnam manufacturing PMI registered 51.0 in November, up from the neutral reading of 50.0 in October. November’s data was the strongest for three months as output increased for the first time in three months, new orders expanded at a faster pace and a return to employment growth signalled. This suggests that the recent soft patch may be coming to an end. Meanwhile, Malaysia reported a deterioration in operating conditions in November, as has been the case in each month since October 2018. The manufacturing PMI of 49.5 highlighted only a slight decline, however, with the rate of decline the slowest in the sequence. Meanwhile, November saw Thailand's manufacturing conditions deteriorate for the first time in nine months, dragged down by declines in both production volumes and new orders. The manufacturing PMI fell to 49.3 in November, down from 50.0 in October, indicating a deterioration in the health of the sector for the first time since February. At 49.7, the average PMI for the fourth quarter so far showed the manufacturing economy heading towards its first quarterly decline this year. Concurrently, Indonesia's manufacturing PMI improved slightly from October, as the IHS Markit Indonesia manufacturing PMI rose from 47.7 in October to 48.2 in November, signalling a deterioration in the health of the sector for the fifth month in a row. While higher than in October, the headline index nonetheless was the second lowest seen since the end of 2015. At 48.0, the average PMI reading so far for the fourth quarter signals that the manufacturing economy is on track for its weakest quarter in four years. As has been the case in every month since March this year, Singapore reported the sharpest deterioration of the seven monitored countries. That said, the headline PMI of 47.7 was the highest for eight months and signalled only a moderate contraction overall.

Elsewhere in Asia, India manufacturing PMI rose from 50.6 in October to 51.2 in November. The latest reading was below the survey average of 53.8 and indicated only a slight improvement in the health of the sector. Australian manufacturing conditions were broadly stagnant in November, as the Commonwealth Bank Manufacturing PMI fell from 50.0 in October to 49.9 in November, indicating broadly unchanged manufacturing conditions. Notably, the latest reading marked the first time that the headline index registered below the neutral 50.0 level since the survey history started in May 2016. According to November survey data, there were signs that the manufacturing downturn in South Korea lost further steam as the headline PMI rose to a seven-month high on the back of weaker reductions in output and employment. Furthermore, although new orders remained in decline, the drop was relatively soft. The South Korea manufacturing PMI rose to 49.4 in November, from 48.4 in October, its highest mark since April. On the other hand, November PMI data pointed to another fractional deterioration in the health of Taiwan's manufacturing sector. The PMI was unchanged from October at 49.8 in November. Notably, the health of Taiwan's manufacturing sector has failed to improve in any month since October 2018.

Source: BIMB Securities Research - 3 Dec 2019

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