U.S.-Euro Area PMI Spread in Manufacturing Collapses

July 1, 2010

The point differential between the U.S. and euro area factory purchasing manager indices narrowed 3.6 points to +0.6 in June, the least U.S.-advantageous spread since December 2008.  Sooner or later, the euro’s downtrend against the dollar was bound to impact the two economies’ relative standing in manufacturing, where currency swings can produce huge shifts in trade competitiveness.  Herd behavior causes markets to over-steer often.  The perception of a healthier U.S. than Euroland economy propelled the dollar steadily higher since late last year.  The disparate moves of the two regions’ PMIs in June show that the appreciating U.S. currency has partly undermined the premise for buying dollars.  During the Great Depression, those countries whose currencies did worst like the U.K. experienced less severe economic contractions.

The orders and production components of the U.S. index, down by 7.2 points and 5.2 points, performed even worse than the headline overall statistic, and a 20.5-point plunge in prices provides yet more proof that a threat of U.S. inflation has been eclipsed by a possibility of deflation.  While the U.S. summary measure fell by 3.5 points on the month, the Italian index went up 0.3 points, and the German and Spanish gauges were flat and off just 0.3 points.  It’s no longer obvious that the Fed will start to lift interest rates sooner than the ECB.

Mf’g PMI’s U.S. Euroland Spread EUR/USD
Feb 2008 48.8 52.3 -3.5 1.475
March 49.0 52.0 -3.0 1.553
April 48.6 50.7 -2.1 1.574
May 49.3 50.6 -1.3 1.555
June 49.5 49.2 +0.3 1.557
July 49.5 47.4 +2.1 1.577
August 49.3 47.6 +1.7 1.497
September 43.4 45.0 -1.6 1.437
October 38.7 41.1 -2.4 1.331
November 36.6 35.6 +1.0 1.268
December 32.9 33.9 -1.0 1.351
Jan 2009 35.6 34.4 +1.2 1.326
February 35.7 33.5 +2.2 1.303
March 36.4 33.9 +2.5 1.306
April 40.4 36.8 +3.2 1.318
May 43.2 40.7 +2.5 1.365
June 45.3 42.6 +2.7 1.401
July 49.1 46.3 +2.8 1.409
August 52.8 48.2 +4.6 1.426
September 52.4 49.3 +3.1 1.455
October 55.2 50.7 +4.5 1.489
November 53.7 51.2 +2.5 1.491
December 54.9 51.6 +3.3 1.459
Jan 2010 58.4 52.4 +6.0 1.409
February 56.5 54.2 +2.3 1.368
March 59.6 56.6 +3.0 1.356
April 60.4 57.6 +2.8 1.342
May 59.7 55.8 +3.9 1.255
June 56.2 55.6 +0.6 1.220

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express  permission.

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