Signs of slower growth mounting

Last week, metal markets were mixed but most metals ended the week slightly lower compared to the close of the preceding Friday. The dominating factor was the economic data released during the week, which had a direct negative impact. However, the indirect effect of the weaker than expected economic figures was supportive. We expected that metal markets would consolidate during Q2 and Q3. Thus, we are currently not much concerned that the weaker than expected economic data would trigger a bear market in metals.

Two types of important economic data are usually released at the beginning of the month, the surveys among purchasing managers in the manufacturing industries of various countries and the US labor market data. In China, the official PMI came in slightly above the consensus, but declined again in May. The HSBC PMI for China edged up to 51.6 after 51.1 in the month before. Nevertheless, the PMI in China is close to the crucial 50 mark. But as long as the PMI stays above this level, the index points to an expanding economy. However, it is understandable that the base metal markets remain concerned that the restrictive monetary policy of the PBoC could drag growth further down.

In the eurozone, the manufacturing PMI declined from 58 to 54.6 in May. While the decline is considerable, it is not a reason to worry as long as the PMI stabilizes around that level. We pointed out several times that readings close or even above 60 were not long lasting and that the PMIs often decline to readings in the mid-50 range. And the economy still could expand strongly with a PMI around 55. Thus, the eurozone PMI is still at a level, which would not prevent the ECB from increasing the rather low refinancing rate further towards 2% by the end of this year or early 2012. The ECB is likely to prepare the market for the next rate hike at the press conference following the council meeting this week.

In the US, the drop of the manufacturing ISM index was even steeper, from 60.4 to 53.5. Furthermore, the unemployment rate edged higher again to 9.1% and only 54 thousand new jobs were created in the non-farm sector. This indicates that the US economy has lost some pace. While it is rather unlikely that the Fed would embark on a new round of quantitative easing, the risk for a rate hike in H2 of this year has also diminished.

The indirect effect on commodity prices worked through a weaker US dollar. Despite the PMI feel in the eurozone and the US, the outlook for monetary policy remains dollar negative. Also the report of the IMF, EU and ECB on Greece with testify that Greek has made progress and the next tranche of the loans to be made in time have supported the euro. Thus, a weaker US dollar is like to partly compensate weaker economic data. Nevertheless, the consolidation is likely to last during the summer.

I will be at a conference this week and can not follow the commodity markets closely. Therefore, the next block article will be published on June 19.