The Reserve Bank of India (RBI) can take comfort from the latest HSBC Purchasing Managers’ Index for Services, which fell to 55.6 in September, well below the August reading of 59.3, or the July one of 61.7.
Though a reading above 50 indicates expansion, the trend has been downwards. And since the HSBC Manufacturing PMI for September also came in lower than the August number, the composite output index, which combined the services and manufacturing indices to give a snapshot of the economy, fell to 56.5 in September from 60.3 in August. The rise in new business across both manufacturing and services is the weakest in 10 months.
Also See Services Growth Decelerates (Graphic)
From RBI’s point of view, what also matters is that pricing pressures appear to have eased. In the services PMI, for instance, the prices charged component was 51.9 in September, lower than the August figure of 53.3 or the July one of 53.1.
Similarly, the manufacturing PMI survey showed the output prices index at 50.9 for September against 52 in August. If, as some economists believe, capacity constraints are so pervasive, then surely industry should have more pricing power?
Growth is slowing in most of the world. The Markit Eurozone Composite PMI fell to a seven-month low in September. In Japan, the composite index is below 50, signalling a contracting economy, undoubtedly the reason for the monetary easing measures taken by the Bank of Japan.
In China, while manufacturing has rebounded, growth in services cooled in September. The UK services PMI showed new business growth slipping to a 15-month low. In the US, the Institute for Supply Management’s factory activity data showed a dip in the new orders to inventory ratio, usually seen as a leading indicator.
Are these macro signals echoed in earnings estimates? Brokerage Motilal Oswal Securities Ltd’s estimate of earnings per share for FY11 for the Sensex companies has seen an upward revision from Rs 1,052 in June to Rs 1,068 now, a slight increase. Interestingly, the bottom-up Sensex EPS estimate for FY12 has simultaneously been revised downward from Rs 1,276 in June to Rs 1,259 now.
Can RBI have already guided the economy to a more sober, more sustainable growth rate? If growth stabilizes at these levels, that should help the markets. Markets may also welcome lower growth in the developed economies, which could usher in the long-hoped-for second round of quantitative easing.
Significantly, Brian Sack, who heads the New York Federal Reserve’s open market operations, recently talked of the benefits of expanding the Fed’s balance sheet which “can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.”
In other words, the Fed will keep the liquidity tap open and try to drive asset prices higher. What could be better news for equities? Or, indeed, for gold?
Graphic by Yogesh Kumar/Mint
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