Base metals gain despite weaker PMIs

All base metals closed the week higher than on the Friday before. Nevertheless, the market came under stronger pressure on Thursday after the release of various PMIs, with especially the HSBC manufacturing PMI for China weighing on the market.

The flash estimate of the HSBC PMI for China declined further from 49.5 in January to 48.3, while the consensus of economists predicted only a marginal decrease to 49.4. Thus, not only the market for base metals but also stock markets came under pressure. However, one should keep in mind that there is also an official manufacturing PMI for China. The HSBC index is a survey under medium-sized, privately owned companies whereas the official survey comprises for large companies, which are mostly owned by the state. This official manufacturing PMI will be released on Saturday, March 1. In January, the official manufacturing PMI was at 50.5, and thus, unlike the HSBC index pointed to a still expanding manufacturing sector. For the February index, the consensus is looking for a slight decline to 50.3. While the official index is expected to point still to an increase in economic activity, the HSBC index shows an accelerating contraction of the manufacturing sector. But only one manufacturing PMI could get it right. As the companies surveyed in the official PMI have a greater contribution to GDP than those in the HSBC index, we would put more emphasis on the official PMI. Nevertheless, the financial and commodity markets rely more on the HSBC index.

Also in the Eurozone, the flash estimates of the manufacturing PMIs disappointed expectations among economists. The flash estimate of the German manufacturing PMI showed a surprising decline from 56.5 to 54.7, which is still indicating an expansion of the manufacturing sector, albeit at a slower pace. More worrisome is the further fall of the French manufacturing PMI from 49.3 to 48.5 while the consensus expected a slight increase. For France, also the service-sector PMI posted a surprisingly strong drop. Thus, fears about the French GDP growth re-surfaced after France grew in the final quarter of 2013. For the Eurozone, the flash estimate showed a decline of the manufacturing PMI from 54.0 to 53.0, which would still point to a further recovery of the manufacturing sector in the Eurozone, but with regional divergences. As the automotive sector reported increasing new car sales even in those countries being hit especially hard after the financial crisis, this development indicates that the demand for base metals should increase in the Eurozone.

In the US, the ISM manufacturing PMI will be released only at the first working day of the following month. Nevertheless, there are several surveys conducted by the regional Federal Reserve Banks, which usually provide a good indication for the nationwide PMI. The Empire State manufacturing index, published by the NY Fed, fell in February to 4.5 down from 12.5 in January. The Philly Fed manufacturing index plunged from 9.4 in January to -6.3 in February. Both indices point to another fall of the nationwide ISM index. A relatively new index is the Markit manufacturing PMI. Data is only available from May 2012 onwards. This index moved against the direction of the other indices and rose by 3 points to 56.7 in February. However, financial and commodity markets focus solely on this index, which triggered a rebound of stock indices and metal prices.

But one should be careful with the Markit manufacturing PMI for the US. This is just the result of a flash estimate. Thus, this estimate might be biased by responses from companies located in regions, which were less impacted by the severe winter season in the US. During the short history of the Markit PMI, it showed partly considerable revisions. Thus, the Markit flash estimate is not necessarily a reliable indication that also the nationwide ISM manufacturing PMI will increase in February. A disappointing index reading might turn out to be negative for stocks and base metal prices. However, a negative reaction at the US stock market might be positive for precious metals.