The following analysis was written by Alejandro Zambrano, ATFX Global Chief Market Strategist.
The stock markets have been suggesting it for a while, and that is probably why they ignored the latest PMI figures from the US and Euro area. A two trillion USD fiscal stimulus is also helping the mood amongst investors.
On March 24, we received a comprehensive update on the economic situation via the US and Euro area PMIs, and the situation is not good. The Euro area PMI composite dropped to 31.4 from 51.6, and lower than the 38.8 projected, while the US Markit PMI composite declined to 40 from 49.6. However, both the manufacturing sectors in the US and Europe performed better than expected. In the US, the drop was minimal, and we saw a decline to 49.2 from 50.7.
The most significant losses occurred in the service sectors, given the shutdown of bars, restaurants, hotels, flights, gyms, and more. The drops in the PMIs are also suggesting that job losses are increasing very fast in the US, with losses at 2009 levels, according to Markit, the producer of the report. For this week’s initial jobless figures, economists anticipate that one million people applied for unemployment benefits.
Markit is also reporting that the drop in the PMI suggests that the US is contracting by 5% annualized. In Europe, the PMI indicates that the economy will contract by 2% in the first quarter.
Despite the weak figures, the Dow Jones and DAX index was up by 13.88%, and 20% from their yearly lows at the time of writing. One explanation is that the stock markets have already dropped aggressively and effectively pricing in the weak figures. Also, central banks and governments worldwide have been supporting the economy, and people in these difficult times.