Global slowdown fears mount on US and Asian data

Data to the left of us, data to the right of us. Markets have been assailed over the past 24 hours by a barrage of information from both the United States and China which points to weakening global demand.

From China its manufacturing activity indicator showed that factor output growth was slowing with the tone of statements from the government suggesting it may have turned negative. The Purchasing Managers' Index (PMI) in China fell back from 55.7 to 53.9 points as did the unofficial equivalent index produced by HSBC.

Economists worked hard to claim that the data did not seriously impinge on China's growth prospects with some even claiming that it would be a positive, dampening fears of overheating in the economy.

The chief economist for China at HSBC Hongbin Qu said: 'The slowdown in the headline PMI suggests that overheating risk is likely to ease as tightening measures filter through.'

Nonetheless, the data came on top of highly disappointing data from the United States. Though the output gap is clearly still very real in America the Supply Management's Manufacturing index still fell back in May from 59.7 to 56.2. This was markedly worse than many economists had expected.

Capital Economics chief international economist Julian Jessop said: 'The fall in the manufacturing ISM...in June means that the index is still consistent with annual growth in the US economy of 4% or so, but is perhaps the last thing investors wanted to hear today given the worries about China and the Euro-zone.

'Markets may also have been prepared for a slightly weaker number by the softer tone of the regional PMIs in the US, but the outturn was still a lot lower than the published consensus.

'The question now is therefore whether the drop back in June is simply a correction to a pace that can be maintained, or the start of a more serious slide. On that the jury is still out, but the global fiscal tightening in the pipeline means that the risks are clearly on the downside.'

By the close of markets in New York last night US equity investors were far from panicking but nonetheless the Dow Jones Industrial Average ended the day 41.49 points down, a fall of 0.42%. It followed a near 100 point fall in the previous day's session and it was a volatile session.

Jessop also warned that while data released yesterday showed construction spending slowing the double dip in US home sales that was witnessed in May data has not yet come through, indicating more disappointing data releases lie ahead.

While Jessop has held back from drawing a pattern from the disappointing flurry of data Tim Condon, the chief economist at ING Asia moved more quickly. He pointed to the sell-off in the dollar following the announcement as an indication that the market is taking it seriously.

He said: 'We ascribe the sharp sell-off in the dollar to a significant downgrade in the consensus view on US economic prospects. We think the sell-off in gold and other commodities was a by-product of dollar depreciation.

However, Condon argues that the sell-offs associated with this round of bad economic news could be followed by a rally in risk assets. 'The narrowing of western European sovereign and financial sector CDS and the bounce in the 10-year US Treasury yield is a hopeful sign that the re-setting of consensus forecasts for US growth is finished, which we think would be associated with a short-term rally in risk assets, including Asian foreign exchange.'