Currency, reserve adjustments may aggravate PMI deterioration

Renminbi revaluation has been on a lot of people's minds lately, after a brief rise in the Chinese currency last week.

General Glut, however, is somewhat doubtful that it will happen soon: "Giving signals -- as some are interpreting last week's 20-minute renminbi float -- seems like the last thing China wants to do..."

Nouriel Roubini, though, thinks that an eventual revaluation is inevitable:

[O]rderly global rebalancing requires both "expenditure switching" via a Chinese/Asian appreciation relative to the US dollar and other floating currencies and, at the same time, "expenditure reduction" via a meaningful reduction of the US fiscal deficit that will require some increases in taxes.

His colleague Brad Setser responds to a Goldman Sachs view that 2005 "is likely to see significantly less buying of US Treasuries -- and US fixed income in general -- by Asian central banks" with the following:

... Goldman is right -- there will be less central bank support for the Treasury market. However, overall reserve accumulation though is not likely to fall as much as Goldman suggests (don't forget about the oil exporters) and there could well be more central bank support for other US fixed income markets.

Less reserve accumulation of US assets by Asian central banks, Federal Reserve tightening -- they all point to further downside for the global economy, on top of the latest round of declines in the global and national purchasing managers' indices as highlighted in the following Reuters report.

Factories in the United States and Europe shifted down another gear in April, worldwide surveys of manufacturers showed, indicating an oil-induced soft patch in economic activity persisted into the second quarter...

"The decline in the PMI likely signals the onset of a period of weak growth in industrial production," said David Hensley, director of global economics coordination at JP Morgan... JP Morgan, which compiles an index of manufacturing activity based on the national and regional surveys of manufacturing purchasing managers, said its global Purchasing Mangers Index slipped to 51.9 in April from 52.9 in March...

The U.S. Institute of Supply Management's index of national manufacturing fell to 53.3 from 55.2 in March... The NTC Eurozone Purchasing Managers' Index...slipped to 49.2 from 50.4 in March...

Yes, the eurozone number is below 50. And at the rate the US PMI has been falling over the past year or so -- it has fallen 4 percentage points in the past 4 months -- don't be surprised if it falls below 50 too within the next few months.