One of the big stories of last week was the surprise downward revision to first-quarter GDP, evidence that the big winter chill had set the economy back much further than previously thought.
By Peter Martin
Wednesday, July 2, 2014
Today’s price movements suggest investors have put that behind them as we start the first day of a new quarter, with optimism in the air that the second half the year will bring new economic growth. The S&P500 index surged to a new intraday high of 1972.99 by late morning in New York, while the Dow Jones Industrial Average rallied 120 points or 0.71% to 16,946, just 32 points short of the index’s all-time high.
Today’s economic data shows improvement in the manufacturing sector, which has historically shown a close correlation with overall economic growth. Markit reported that its final reading for its manufacturing Purchasing Managers’ Index (PMI), derived from a questionnaire sent to a selection of companies in the manufacturing sector, advanced to 57.3 in June from the 56.4 level seen in May. With a mid-month ‘flash’ reading of 57.5, the report implies strong conditions throughout the month. New orders was at the forefront of the improvement, with a reading of 61.2 for this most forward-looking of components in the index, up from May’s already buoyant 58.8. Output is another component up in the heady levels above 60, and with such strength in new orders we might expect further advancement in this area.
Burgeoning new orders was also a facet of this morning’s other big manufacturing report for the US, the ISM manufacturing index. The headline level was little-changed at 55.3, following on from May’s 55.4, but new orders pushed higher to 58.9 from May’s level of 56.9. Production at 60.0 is extremely strong, but the overall level of the index was constrained by softness in backlog orders and employment. Upbeat auto sales for last month, released today, was another cause for optimism on the stock market. Chrysler announced sales growth of 9% in June.
The economic picture globally is looking stronger also, with China’s manufacturing PMI rebounding to 50.7 in June from May’s contractionary 49.4 (50.0 is the boundary that separates growth from contraction). New orders recorded their fastest pace of growth in well over a year and this positive sign for Chinese growth has helped fuel a risk-on sentiment today, sparking demand for assets perceived as risky but with a potential for higher growth and damping demand for safe-haven instruments.
Gold slipped 0.06% to $1326 per ounce, while the Japanese yen lost ground against many commonly-traded currencies. The dollar strengthened 0.18% against the yen to 101.51. The Aussie dollar particularly benefitted from China’s improved manufacturing conditions, as China is Australia’s biggest trading partner, and AUD/USD rose 0.59% to 0.9489.
The UK was another country recording manufacturing improvements for June, with its PMI climbing to 57.5 from May’s 57.0 and beating expectations which had pointed to no change. Output improved for the sixteenth month straight and adds weight to the scales already tipping in favour of tightening by the Bank of England sooner rather than later. GBP/USD rose 0.23% to 1.7145, hitting its highest level since October 2008 earlier in the session.
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