\n\tBy Greg Peel<\/p>\n
\n\tThe Dow rose 18 points, or 0.1%, while the S&P was flat at 1460 and the Nasdaq<\/span> lost 0.2%.<\/p>\n \n\tMy editor informs me there is much confusion in the market about how a purchasing managers' index (PMI) actually works. I have touched on this many times before, but I will reiterate today following releases over the past 24 hours of flash estimates of September manufacturing PMIs<\/span> from China, the eurozone<\/span> and the US.<\/p>\n \n\tThe change in a PMI from month to month represents movement in the rate of change of expansion\/contraction of the sector, with 50 being the point of zero change. A number above 50 means the sector is expanding. The higher that number is above 50 the faster that sector is expanding, from last month to this month. A number below 50 means the sector is contracting. The lower the number below 50, the faster the rate of contraction.<\/p>\n \n\tThink of a car going either forward or in reverse. If the PMI rises from 51 to 54 that car is going forward and has hit the accelerator pedal. If the PMI falls to 51 from 54 that car is still going forward but is on the brake pedal. If the PMI falls from 49 to 46 that car is going backwards and accelerating backwards. If the PMI rises to 49 from 46 the car is still going backwards but is on the brake pedal. Note that we rarely see a PMI over 60 or under 40. These imply breakneck acceleration in either direction – fighter pilot G-forces.<\/p>\n \n\tLet's now put this into the context of the actual numbers. Bear in mind that PMIs<\/span> are based on a survey of sector participants conducted over the month. The final results are always published on the first business day of the next month but one week out from month-end, a lot of the responses are already in. From this sample set, HSBC (China) and Markit<\/span> (Europe, US) provide a “flash” estimate of what the final result might be.<\/p>\n \n\tHSBC's flash manufacturing PMI for China has risen to 47.8 in September from the final August result of 47.6. The trap is to think this means the Chinese manufacturing sector thus expanded, but as explained above it means the sector still contracted but at a slower pace of contraction. If you are trying to bring a reversing car to a stop so you can go forward again, but first you must first apply the brakes and slow the car down. This result is thus not great, but encouraging, as it implies the sector may be now quietly approaching the point where it will once again expand (>50).<\/p>\n \n\tThe eurozone's manufacturing sector has also slowed its pace of contraction, rising to 45.5 on the estimate from 44.4. However the service sector equivalent is still increasing its contraction, such that the eurozone's composite (aggregated) PMI has fallen to 45.9 from 46.3 to mark the 39th<\/span> month of contraction. The US manufacturing estimate remained flat at 51.5, implying timid expansion.<\/p>\n \n\tIn other US economic news last night, the Conference Board leading economic index fell 0.1% in August, while the Philadelphia Fed manufacturing index rose to minus 1.9 from minus 7.0 in August. The Philly, Empire State (New York) and Richmond Fed indices (all twelve Fed regions publish one but these three are the biggies<\/span>) are similar to a PMI in terms of rate of change, except in this case zero, rather than 50, represents the expansion\/contraction crossover point.<\/p>\n \n\tLast night the Spanish government auctioned E48bn<\/span> of sovereign bonds including a lump of ten-years. Spain achieved a borrowing cost of 5.67% for the tens compared to 6.65% last month. That's a whopping difference, reflecting the ECB's<\/span> rate-cap pledge in the interim. But this big improvement only serves to render a bail-out request from Spain even less likely. The prime minister has indicated he has no intention of making such a request at this stage, and Draghi<\/span> has said he can't actually buy any bonds unless there is a bail-out request.<\/p>\n \n\tWelcome to the eurozone<\/span> “cold war” between the ECB<\/span> and the bond vigilantes.<\/p>\n \n\tI have noted before that a central bank will control the overnight cash rate by either withdrawing or injecting funds from\/into the overnight banking market. When the RBA<\/span>, for example, decides to lower its rate it will inject funds in order to make cash cheaper. But oftentimes the central bank need only announce a rate cut and the market will adjust anyway, with no actual funds needing to be injected. Don't fight the central bank.<\/p>\n \n\tWhat we have now in Europe is a similar situation. The ECB<\/span> says it will buy Spanish bonds if it has to, so the bond traders have bought ahead (or reversed shorts) and thus pushed the Spanish bond yield back down. If the ECB<\/span> actually did buy bonds then the rate would fall, but the mere threat is enough for the market to adjust anyway. The ECB<\/span> won't actually buy bonds unless Spain asks for a bail-out, but lower rates now mean Spain doesn't have to ask for a bail-out.<\/p>\n \n\tThe nukes are lined up on the bond trader side and the nukes are lined up on the ECB<\/span> side. The traders know a launch would only bring certain destruction flying back the other way. Either one side will give, or we'll be stuck with this standoff for about four decades before the Berlin Wall comes down.<\/p>\n \n\tGiven the eurozone<\/span> PMI result proved the more sluggish, the US dollar index rose 0.4% last night. The Aussie has obligingly fallen 0.5% to US$1.0434 and gold has again slipped a little, to US$1768.70\/oz. Base metals were also a percent lower on average.<\/p>\n \n\tIn that crazy world we call the oil market, this week's spectacular price crunch has finally brought out some buyers (or short-coverers). Brent for November delivery rose US$2.26 to US$110.45\/bbl<\/span> and if we take the November delivery (rather than the expiring October) contract, West Texas rose US63c<\/span> to US$92.93\/bbl<\/span>.<\/p>\n \n\tWe have also now rolled into the December bellwether contract for the SPI<\/span>, and the SPI<\/span> Overnight rose 12 points or 0.3%.<\/p>\n \n\tOn the subject of contract expiries<\/span> and rollovers, tonight in the US sees the “quadruple witching “of stock and index options, futures and future options expiries<\/span>, from which a fun time can often be had. Tonight also sees a quarterly S&P 500 weight rebalancing.<\/p>\n \n\tToday in Australia sees a full-year earnings result from Premier Investments ((PMV<\/span>)).<\/p>\n \n\tAll overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX<\/span> and more available in the FNArena<\/span> Cockpit. Click here<\/a>. (Subscribers can access prices in the Cockpit.)<\/em><\/p>\n \n\tAll paying members at FNArena<\/span> are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.<\/em><\/p>\n