More Contraction In Italian Services As The Agony Goes On And On

Italy's services sector contracted for the 11th consecutive month in October and new business levels and corporate morale hit record lows, according to the latest PMI survey published yesterday (Wednesday). The latest Markit/ADACI purchasing managers' index fell to 45.7, only just above July's 45.6, which was the lowest headline reading in the survey's near 11-year history.

"Italian service providers indicated that the entrenchment of the worldwide financial crisis, alongside marked falls in consumer demand, were the primary drivers of falling activity as they resulted in the survey record fall in new orders," Markit said.

The new orders index plunged well below the 50 divide between growth and contraction to 44.0 from September's 49.5, with transport and storage and postal and telecommunications companies the worst hit. Confidence among service providers hit the lowest level since the survey began, dropping to 54.5 from 63.9 in September.

Alongside the manufacturing PMI (see earlier post), which registered its lowest level in its 11-year history in October, and the launching of the bank support plan as domestic credit grinds to a halt (see yesterday) the data underline the daunting task facing Silvio Berlusconi's government which is still considering how to try to revive the economy without adding to the country's massive public debt.

The services PMI survey showed input price inflation drpooed back to a 13-month low, even if at 60.7 it still remained above the long-term average of 59.7. The tough business climate, however, prevented companies from passing their rising costs on to customers and prices charged index fell in October to 49.1, adding to evidence of a drop in inflationary pressures that could calm the troubled nerves over at the European Central Bank as they move in with the first of what are expected to be a series of aggressive rate cuts when they meet this afternoon.


Global Services Contract

Outside Italy, service sector activity in the euro zone hit a fresh decade low in October. The final Markit Eurozone Purchasing Managers' Index slumped to 45.8 the lowest in the survey's 10-year history. The fact that the final reading is significantly below the flash estimate (of only one week ago) and sharply down from September's 48.4 would seem to indicate that the contraction in services is accelerating rapidly at this point across the eurozone.

Global services activity also slumped to its lowest level since 2001 in October, dragged down by the especially weak European service sector, according to the Global Services Business Activity Index, produced by JP Morgan, which plummeted to 44.2 in October from 50.2 in September.

That was the second lowest result in the survey's 10-year history, behind only the month after the September 2001 attacks in the United States.

Itay's Government Set To Inject 30 Billion Euros Into Banks

According to press reports today the Italian government is preparing to provide a capital injection of up to €30bn ($39bn) for Italy's troubled banking sector. Details of the plan are expected over the next few days, but the main objective seems to be an attempt to ensure the banks have sufficient liquidity to enable them to keep lending to Italian companies and keep an economy which appears to be in danger of seizing up turning over. This news follows weeks insisting from Rome that Itay's banking sector did not need to be recapitalised.

The Italian government is still very reluctant to officially disclose the value of the package, since clearly given the level of Italian public debt this is a very sensitive issue. Berlusconi basically stone walled reporters at a Milan press conference earlier today (Wednesday). He limited himself to stating that the government intended to pass the measures by decree, which is a fast-track way of enacting legislation. He added that the Italian government intended to guarantee some bank debt and buy preferred stock in banks if necessary.

Italian companies have been complaining quite loudly in recent days that the banks are becoming increasingly reluctant to lend or to roll over debts, and this, in an economy where bank loans are the main and often the only form of financing for all except the very biggest companies, is a big problem when it comes to keeping business moving. There is growing evidence - in the form of the slowdown in manufacturing activity and the drop in retail sales - that this is not mere winging, and that there are significant difficulties in obtaining credit. What this means is that the Italian economy is now possibly heading not for a couple of years of zero or slightly negative growth, but for a severe recession. Economists at Capital Economics forecast this week that the Italian economy would shrink by 1.5 per cent in 2009. This seems to be in the right ballpark if we take the data we have been seeing recently seriously, and I personally am revising downwards my own expectations - which weren't exactly high before this current phase set in.


Details of what the government is planning have not been finalised, and talks were continuing among the banks, the Bank of Italy, and the relevant ministries, the bankers said. But the plan may well be unveiled ahead of a meeting of European Union leaders on Friday.


Economic development minister Claudio Scajola has also indicated that the government is in the process of creating a €650m fund to guarantee lending to small and medium-sized Italian enterprises hit by the credit squeeze.

The Italian government approved a decree on rescuing banks on October 9 but the government has still to disclose how it plans to implement it. Unlike other European countries, Italy has not poured any cash into its banks and has not created a special fund to help them. But it has offered to inject capital or underwrite debt if any bank requests it. But a new entity - called the Corporate Financing Fund - has been created and its remit will be to keep open a channel of financing to companies in an attempt to avoid that "in the context of a recession, banks restrict lending and choke companies,'' in the words of Finance Minister Giulio Tremonti.

The government may use tools like perpetual bonds, which pay interest indefinitely, to help finance the plan, according to Vittorio Grilli, director general of the Italian Treasury. The funds for Italian companies will be part of a broader package of measures aimed at helping banks raise their capital levels to make it easier for them to sustain lending.

Government Borrowing Getting More and More Difficult


The yield spread between German 10 year bunds and some other eurozone sovereign debt of equivalent maturity is now the widest since 1997, and investors are demonstrating a preference for only the most liquid of government bond markets as implications of the scale of the European bank bailout begins to dawn on the financial markets. The gap between bunds and their Italian counterparts widened to 127 basis points yesterday, while difference with Spanish 10-year debt was 69 basis points as news broke that the country's economy contracted in the third quarter for only the first time since 1993.

Also we learnt today that credit-default swap traders were prepared to bet more the default risk for Italian and Spanish government debt and Deutsche Bank than on any other comparable risk wager, according to a Depository Trust & Clearing Corp. report that gives the broadest data yet on the credit-default swap market.

A total $33.6 trillion of transactions are currently outstanding on governments, companies and asset-backed securities worldwide, based on gross numbers, the DTCC said in a report released yesterday (Tuesday). After canceling out overlapping trades, investors have taken out a net $22.7 billion of contracts based on Italy's debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt, the report shows.

The DTCC, which operates a central registry of credit swaps trades, released the data for the first time as the industry steps up efforts to counter critics among U.S. lawmakers and regulators who blamed the lack of data for exacerbating the financial panic.

Investors have focused wagers on debt of industries and countries that may be most affected by a credit crisis which is now entering its 15th month. The Spanish economy is headed toward its first recession in 15 years amid a slump in its housing market and banking and finance shares have dropped as the credit seizure starts to caused builders and property devopment companies to collapse.

Credit-default swaps on Italy were quoted at 108 basis points yesterday after reaching a record 138 basis points on Oct. 24, CMA Datavision prices on 10-year contracts show. The contracts have more than doubled since August. Yesterday's trading represents a cost of $108,000 a year to protect $10 million of debt for 10 years. Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 79 basis points.

Turkey, Italy, Brazil, Russia, GMAC LLC, and Merrill Lynch & Co. had the biggest gross amount of contracts outstanding on their debt as of Oct. 31. Turkey alone had $188.6 billion of default swaps written against its debt. The gross amount however doesn't take into account offsetting trades. After netting the trades, there were, for example, only $7.6 billion outstanding on Turkey's debt.

Italian Manufacturing Contracts Sharply Again In October

Italian manufacturing activity contracted at the fastest rate in at least 11 years in October as the global financial crisis continued to hit the real economy, according to the latest Markit/ADACI PMI survey out yesterday (Monday). The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey.

Italian new car sales were down 18.89 percent year-on-year in October, according to data earlier this week from the transport ministry, Fiat sales were down 13.1 percent, and their market share stood at 32.83 percent.

Other recent indicators have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.



Last week Confindustria said Italy was in "the darkest moment of the economic and financial crisis" where government action was needed to halt a recessionary spiral, but it also noted Italy's huge debt burden limited its options.

Fastest Rate Of PMI Deline Yet Recorded

The latest Markit/ADACI data point to a very sharp October deterioration in operating conditions in the Italian manufacturing sector. The headline Purchasing Managers' Index (PMI) , which is designed to give a single-figure snapshot of operating conditions in the manufacturing economy, posted 39.7 in October, falling from 44.4 in September, the fastest deterioration in operating conditions in over eleven-and-a-half years of data collection. Output, new orders, employment, backlogs of work and purchasing activity all declined at series record rates.




Markit reported that survey respondents attributed the sharpness of the decline to the deepening of the financial crisis, which had reduced demand from both domestic and overseas markets. Total new orders contracted at a series record pace, while orders from abroad fell at their strongest rate since October 2001.


Record declines in production volumes and incoming new business inevitably fed through to employment levels in the manufacturing sector. Firms reported in many cases that outgoing staff had not been replaced, in line with cost considerations. October marked the fastest rate of job-shedding in the history of the survey.

Respondents also reported that price pressures eased considerably during October, with input price inflation slowing to a fractional rate. Firms reported that a dramatic decline in the global prices for raw materials had been the primary driver of rapid price disinflation they were seeing. However, a stronger US dollar was reported in some cases to have raised costs. The easing of input cost inflation, alongside weakening demand increasing competition, resulted in Italian manufacturers reducing factory gate prices for the first time since August 2005.

Firms markedly reduced purchasing activity during October, with panellists indicating that protracted falls in demand and output had reduced the requirement for input goods. A record decline in the quantity of purchases bought reduced pressures on suppliers, resulting in a sharp improvement in delivery times. Stocks of pre-production inventories also contracted considerably, as firms delay purchases at a time of heightened uncertainty.

At 32.0, the seasonally adjusted New Orders Index signalled the sharpest decline in incoming new business to the Italian manufacturing sector in the history of the survey. Moreover, the index fell considerably from 40.4 reported in September. Over 53% of respondents recorded a fall in new order books, reporting that the world wide economic downturn had strongly affected domestic demand and that the financial crisis had forced clients to hold off purchasing activity.


New orders received from abroad also plunged during October, as signalled by the seasonally adjusted New Export Orders Index posting 38.5, falling substantially from 44.5 in September. A sharper decline in new orders has only previously been recorded once before, in October 2001 (the aftermath of the US terrorist attacks). Panellists indicated that the world wide financial crisis had been the main driver, and that demand from key export markets including eastern Europe and the US, had been notably affected.

Staffing levels in the Italian manufacturing sector were cut at the fastest rate in the survey history during October. At 45.5, the seasonally adjusted Employment Index fell from 48.7 recorded in September, to indicate a marked rate of job shedding. Almost 13% of panel members indicated that employment levels had been cut, reporting that significant declines in demand (from both domestic and overseas markets) was the primary driver. A number of firms also indicated that outgoing staff had not been replaced in order to reduce costs.

At 49.1, the seasonally adjusted Output Prices Index fell from 52.2 in September to signal a decline in factory gate prices for the first time since August 2005. The reading was well below both the twelve-month and long-run series averages of 55.0 and 52.9 respectively. Panellists broadly attributed the cut in tariffs to falling demand leading to increased levels of competition, alongside the abatement of raw materials costs over the month reducing the pressure to raise charges.

Input price inflation eased to a thirty-nine month low in October and, at 50.2, the seasonally adjusted Input Prices Index signalled only a marginal rise in costs. Highlighting the sideways trend, almost 60% of panellists indicated that input costs had remained constant during October. Those panel members facing an increase in costs cited the weak euro/dollar exchange rate as the primary driver. Firms reporting a decline in input costs indicated that a marked fall in the cost of raw materials over the month had been the main contributing factor.

The JP Morgan Global Manufacturing Index Plummets Too


The October contraction in Italy, while undoubtedly revealing in its own right, in fact forms part of a much more general global pattern. Indeed the latest JP Morgan Global PMI report really does makes for quite depressing reading.

The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.

"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."
David Hensley, Director of Global Economics Coordination at JPMorgan

Economies across the Eurozone are being affected. The French manufacturing purchasing managers index was revised down to a series low 40.6 in October, down from both the 'flash' estimate of 40.8 and September's 43.0 figure, Markit Economics said in a press release issued on Monday.

Disaggregating the figures, the output component fell to an all-time low of 37.8 from September's 41.7 level, while new orders slipped all the way to a series low of 34.9 for the month, down 2.6 points from September's 37.5 level. Purchase quantities and new export orders also saw some new record lows in October, falling to 33.7 and 38.5 respectively.



Germany's manufacturing sector contracted in October at the fastest pace in seven years as incoming orders and output experienced their sharpest declines in more than 12 years. The headline index in the Markit Purchasing Managers Index for what is Europe's biggest economy fell in October to 42.9 from 47.4 the previous month, well below the 50 mark that separates growth from contraction.

Spain's manufacturing sector continued to shrink at a record pace in October, with both output and new orders contracting and employers shedding jobs at a near record pace, according to the latest Markit Economics Purchasing Managers Index published yesterday (Monday). The Markit PMI for Spain dropped to 34.6 in October, the lowest reading registered by any eurozone economy since the series began in February 1998 and down from the already rapid 38.3 point contraction in September. On the PMI system any figure below 50.0 shows contraction while figures over 50.0 show growth. As we can see, according to this indicator Spanish manufacturing has now been weakening steadily since the start of 2006.



Eastern Europe


Hungary's manufacturing industry contracted sharply in October, with the PMI dropping 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst reading registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM).

In Poland the ABN Amro Purchasing Managers Index fell for the sixth month running to 43.7 (down from September's 44.9) a record low and well below the neutral reading of 50, according to Markit Economics yesterday. In the Czech Republic, manufacturing output contracted for the seventh month in a row, and the index hit an all-time low of 41.2, just above the revised euro zone figure of 41.1. As the Eurozone itself contracts, these economies which are heavily dependent for exports to the zone will be buffeted, especially now that forex loans for their domestic housing markets have all but dried up.




US Manufacturing

The US manufacturing PMI dropped back to 38.9 in October from 43.5 in September, indicating a significantly faster rate of decline in manufacturing when comparing October to September. It appears that US manufacturing is experiencing significant demand destruction as a result of recent events. October's reading is the lowest level for the US PMI since September 1982 when it registered 38.8 percent. On the other hand inflationary pressures are evaporating rapidly, and the Prices Index fell to 37, the lowest level since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time in 70 months.


The BRICs

China's PMI dropped to lows not previously seen in October, confirming that the economy of the so-called factory of the world is now decelerating along with everyone else. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.

According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis.

"The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."

The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September



Russian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting.





Business conditions in the Brazilian manufacturing worsened in October for the first time since June 2006. The headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) posted 45.7, down from 50.4 in September, pointing to a sharp contraction -the fastest in the survey history in fact. The PMI was driven down by accelerated declines in output and new orders, as well as falls in employment and stocks of purchases.

Even in India the seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index dropped steeply in October, falling to a record low of 52.2, down from a reading of 57.3 in September suggesting another sharp deceleration in growth, even if Indian industry managed to keep expanding. The biggest fall was in the new orders sub-index, which dropped to 54.4 in October from 62.6 in September. Perhaps the saving grace in the Indian survey is that most firms said demand remained strong in domestic markets, while it had been international orders which had waned. This can also be seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing that Indian year on year export growth slowed to 10.4% in September. Thus the Indian expansion is still hanging on in there, by its fingernails, but it is hanging on in.