Market Overview

Global Growth Stagnates in November

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Purchasing Manager's Indices from around the world released over the past few days have pointed to a lack of global growth in November, with improvement in China being offset by weakness in the U.S., partially attributable to Hurricane Sandy, and the perpetual recessionary state of the European economy.

On Friday night, the National Bureau of Statistics in Beijing reported that the official Manufacturing PMI rose to 50.6 in November from 50.2 in October, showing a slight improvement in growth in the sector. Also, the official Non-Manufacturing PMI rose to 55.6 in November, a slight increase over October's 55.5. Lastly, the HSBC China Manufacturing PMI rose to 50.5 from 49.5 in October, the first positive reading since October 2011. All together, the data points to a modest improvement in Chinese growth.

Monday morning, eurozone nations released manufacturing PMI's to mixed results. The Eurozone Manufacturing PMI, compiled by Markit, was flat at 46.2 in November from October and in line with economist estimates. The reading marks the 16th consecutive month of contraction in the currency zone's manufacturing sector.

Notably, Spain's manufacturing PMI rose to a 15-month high of 45.3 in November and Ireland's manufacturing sector was the strongest, as the PMI rose to 52.4, the highest reading across nations covered by Markit. Meanwhile, the Italian PMI fell to the weakest level in three-months at 45.1 and the French PMI rose to a three-month high of 44.5 while Germany's PMI rose to 46.8, a two-month high.

The slightly positive data from China and the mediocre data from Europe were offset by weakness in the U.S. in November, as the ISM Manufacturing Report on Business fell to 49.5 in November from 51.7 whereas economists had only expected a small drop to 51.4. The weakness in the report was broad, as the New Orders sub-index, the employment sub-index, the inventories sub-index, and the prices sub-index all saw sharp declines in the month.

Last week's third quarter GDP report showed a large increase in inventories in the quarter and this month's ISM Manufacturing Report shows that the inventory cycle is now starting to reverse; after a build-up of inventories, production slows a bit to clear inventory, which boosts growth as inventories build and then weighs on growth as inventories clear.

The combination of the inventory cycle and Hurricane Sandy weighed on growth. However, these are both transitory, short-term effects that should reverse in the future. Taking all of the data in to consideration, it is apparent that growth stagnated in November. However, cyclical indicators such as the reversal of the inventory cycle could indicate that growth is set to rebound in the coming months.

Also, any rebound in growth in the Eurozone will benefit China and the U.S., as it is the China's largest trading partner and the U.S.'s second largest. However, growth is contingent on a deal being reached on the Fiscal Cliff and markets could shrug off data until the large uncertainty surrounding the Fiscal Cliff is removed.

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