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The Table Setter: China PMI

06/01/2012

On Thursday evening, May 31, the China Purchasing Managers’ Index (PMI) for the month of May was reported at 50.4, down from last month’s 53.3 and below the consensus forecast of 52.0. This breaks the five-month streak of increasing PMI readings. Keep in mind, the month of May is historically weak. Seasonality clearly played a factor in the slowdown.   
 
•    May 2011 52.0 vs. April 2011 52.9
•    May 2010 53.9 vs. April 2010 55.7
•    May 2009 53.1 vs. April 2009 53.5
•    May 2008 53.3 vs. April 2008 59.2
•    May 2007 55.7 vs. April 2007 58.6
•    May 2006 54.8 vs. April 2006 58.1
 
Global markets are selling off on the news, and the report will do little to reverse the negative momentum in three specific sectors: materials, industrials, and energy. Holdings in those sectors should remain market weight at best. For energy specifically, my answer to when I will upgrade the sector from my February 1 downgrade is simple – “not yet.”
 
My expectation has not changed that Chinese monetary policy will be a tailwind for global capital markets in the second half of 2012. I take the other side of this morning’s negative reaction to the first decline in five months. In particular, the continued benign CPI readings clear the path for further easing. Premier Wen Jiabao has the necessary tools to reaccelerate growth. I would expect further cuts to the reserve requirement ratio and interest rates. If needed, a mini-2008 stimulus could also be initiated.
 
 
China PMI, June 2011 to May 2012

Source: Bloomberg
 
XLE, June 2011 to June 2012

Source: Bloomberg
 
XLI, June 2011 to June 2012

Source: Bloomberg
 
XLB, June 2011 to June 2012

Source: Bloomberg

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