Deflation threatens as German PMI contracts ISM Prices tumble ruble wilts

The second contraction in Germany’s manufacturing PMI over the last three months, the lowest prices paid index figure in US manufacturing ISM in 23 months and fresh record lows in the Russian rouble, highlights the impending global disinflationary spiral in H1 2015, which would leave central banks, including the Fed, little choice but to continue talking the hawkish talk instead of walking the hawkish course. But this may no longer prove kind to global equities as corporate profits are further tightened, foreign exchange translation is eroded and oil’s downward trend becomes more punishing to energy project lenders than rewarding to individual consumers.

US manufacturing prices at two-year lows

US Nov manufacturing ISM fell to 58.7 from October’s reading of 59, maintaining the sector’s expansion for the 23rd consecutive month. The prices paid index tumbled nine points to 44.5, reaching its lowest point since July 2012, reflecting a sharp fall in raw materials prices. It was good news on the jobs front as the ISM’s employment Index grew for the 17th consecutive month, up 0.6 points to 54.9. The rest of the report proved mixed as far as its sub-components, with new orders Index up to 66 from 65.8 and the production Index slipping to 64.4 from October’s 64.8.

German PMI contraction

Final Eurozone manufacturing PMI was revised down to 50.1 from the flash estimate of 50.4, but Germany’s index, which was revised to 49.5, had the weakest reading since June 2013 and the second contraction in German manufacturing over the last three months. Although Germany’s IFO and ZEW surveys of investment and business sentiment ticked up in November, our proprietary models indicate that German manufacturing and services PMIs have tended to lead the German cycle than have IFO and ZEW.

Russian rouble chases falling oil

The relationship between oil prices and the Russian rouble is best captured in the chart below.Since reaching its most recent peak in June at $115.71 per barrel, brent crude is down 39%, during which the rouble fell 37%. Interestingly, the rouble’s decline matches that of 2008-2009 when oil price crashed more than 75%. For the rouble to fall by the same magnitude on the back of an oil decline that’s half that of 2008/9 highlights the sobering fact that there’s more to the rouble’s woes than just falling oil.

The implications of weaker oil are also manifested through Russia’s eroding foreign currency reserves, which have reached $371 bn in October- an 11% decline from June and a 23% drop from the 2011 highs.

Yet, although Russia’s economy is suffering from its worst slowdown in five years following the decline in oil and escalations of international sanctions international sanctions over the Ukraine conflict, the cheaper currency is being encouraged as it helps exports. As much as $130 billion in capital flight may have left the country, but the nations’ reliance on oil and gas for half of its budget revenue will help maintain the balance in a surplus near $21 billion.

The weakness in Russia may still be sustained by Moscow into H1 2015, but the domino effect from Russia-Germany sanctions and the dampening effect on Germany’s demand for Chinese imports, could accelerate the transition from China’s softening growth to the most feared hard landing.