India’s PMI bounces for a second month, but beware the noise from the signal
India’s 4Q13 GDP print released on Friday generated predictable angst, because it suggested that even the government’s somber growth estimate of 4.9% for this year (FY14) will likely not be met. But it’s important to remember this is water under the bridge, reflecting growth dynamics from almost 5 months ago. Instead, the high-frequency data in January -- for the first time in months -- rekindled some hope with both sets of PMIs, exports, and non-oil, non-gold imports exhibiting some buoyancy. But there were two niggling concerns? First, is this a flash in the pan or will the lift sustain beyond a month? Second, will the survey strength translate into actual activity momentum in the January IP data? Solid gains, but beware the noise from the signal The first question was (ostensibly) answered today. The February PMI lifted even more strongly than its January counterpart, increasing by 1.1 pts to print at 52.5 – the highest level in a year. That said, an important caveat is in order. Even though the PMI’s are seasonally-adjusted, January and February are always tricky months to interpret because production patterns get altered in the run-up to the annual budget at the end of February which has the power to change production and trade taxes and duties. Anticipating such changes, production typically reacts in the run-up. As it turns out, over the last six years, both January and February have seen a consistent – but artificial -- bump that has faded meaningfully in March (see chart). So whether the large February bounce is simply noise or something more fundamental remains to be seen. We therefore need to be very careful in interpreting the bounce in January and February. With that caveat in place, the internals of the February print were even more flattering than the headline. Output jumped 1.4 pts to print at 54 – the highest level in a year. Furthermore, this was not simply inventory stocking – as was the case in some recent months wherein production gains were matched by inventory accumulation and therefore did not bode well for future production. Instead, stocks of finished goods remained at the same level as in January. It is against this backdrop that the forward-looking gains are very important. New orders surged 2.5 pts to 54.9 – also the highest level in a year – such that the new order/inventory ratio rose to a 11 month high, and bodes well for IP in February or March. The new order joy was evenly distributed. New export orders rose for a third successive month (1.5 pts to an 8 month high), suggesting that the December lift in actual realizations was not an aberration. But, given the quantum of the overall increase in new orders, the implication is that there may be some life in domestic orders too.  Those pesky input prices ! In contrast to the good news on the activity front, price data in February generated some concerns. Recall, headline inflation has experienced welcome relief in recent months as vegetable prices have plunged in recent months, bringing down food and headline inflation with it. But we have worried that if growth were to accelerate then core inflation would come under renewed pressure as firms – that have experienced a sharp margin compression over the last year – will rush to normalize margins. This concern was accentuated in February as input prices surged, but output prices retreated in likely response to weak pricing power. Output prices had unexpectedly jumped 0.6 pts in January, but more than gave back that increase in February, retreating by a full point to settle at 51.4 – at about the level they were hovering in November and December. But the nasty shock was that input prices galloped 3.3 pts to 61 – the highest level in four months. A surge in input prices and retreating output prices means that margin pressures were sharply accentuated in February, and adds credence to our concern that if growth were to accelerate, output and core prices might move quickly in tandem.  Encouraging, but durable? All told, solid increases in the January and February manufacturing PMIs have injected some hope that maybe – just maybe – the worst may be over on the industrial front. This has been reinforced by strong trade data in January. But the PMI prints need to be viewed with some caution, because they may simply be capturing the typical pre-Budget bounce and therefore may not endure. In light of this potential noise, the March PMI becomes crucial. If the lift in the January high frequency data translates into a strong January IP number, and is reinforced by a solid March PMI, there could be case for arguing that an inflection point for industry is being reached. The early signs are encouraging but let’s not jump the gain. Furthermore, despite any industrial lift in 1Q14, GDP growth momentum, more broadly, is expected to moderate further under the weight of the fiscal drag this quarter. But markets will look through that, if there is some evidence that some light at the end of the long and dark industrial tunnel is finally emerging.    |
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