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At the conclusion of the latest WEF meeting in Davos, many of the leaders there were optimistic that the world would avoid a recession. Or, at least, if there was a recession, it would be short and shallow. A substantial portion of that optimism relied on an expectation that China would rebound, now that it was putting covid restrictions away.

The meeting happened right after the latest GDP figures from the world’s second-largest economy, which were well above expectations. That helped offset some of the negativity that would be expected when the US reported slower-than-expected industrial growth. So, it begs the question: Are major investors looking at this as the bottom? Or is there a further downside?
 

What to look out for

One of the clues could be in PMI data, to see where advanced trends in the economy are headed. Over the last several months, most major economies were reporting PMIs below the 50 level, which indicate contraction. But the latest consensus shows that the indicator might be starting to rise again, particularly in Europe.

Europe’s ability to keep up with energy demand has helped boost optimism in the shared economy, with stocks moving to 9-month highs. If PMIs were to move above 50, it could provide further impetus to the notion that the ECB will keep hiking and supporting the Euro. Meanwhile, if PMIs in the US were to show a similar trend as industrial data, it could weaken the greenback.
 

Key data points:

Australia’s Manufacturing PMI is expected to fall to 49.5 from 50.2, entering contraction for the first time since the pandemic. This is despite reports of thawing relations between Canberra and Beijing which are expected to increase trade. Services, on the other hand, are expected to tick up though remain in contraction at 47.5 compared to 47.3 prior.

French Manufacturing PMI is forecast to improve to 49.7, up from 49.2 prior. That’s only marginally in contraction. France is the first major EU company to report, and could then set the tone for optimism if the result were to come in above expectations. Services PMI is expected to do even better at 49.8, up from 49.5 prior.

German Manufacturing PMI is expected to also improve but remains in worse condition than France, at 47.8 compared to 47.1 prior. Services, on the other hand, are expected to almost return to expansion at 49.6 compared to 49.2 prior. The latest news on German energy reserves has been positive, but the last few days have seen cold weather in Europe, with expectations it could continue. Coinciding with the PMI survey, that could dampen the optimism among executives in Europe’s largest economy.

UK Manufacturing PMI is expected to stage a marginal improvement though remains firmly in contraction at 45.5 compared to 45.3 prior. The persistent strikes and reports that even more are expected in February have contributed to pessimism in the industrial sector. Services, on the other hand, are forecast to remain in contraction by the bare minimum at 49.9.

US Manufacturing PMI is forecast to stay firmly in contraction at 46.2, unchanged from December. Services PMI is expected to show a marginal improvement to 45.0 from 44.7 prior. A beat of expectations would come as a larger surprise to markets, given how much of the other data has been pessimistic.

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