China PMI 49.2
The month of September begins with investors digesting another disappointing economic data point from China. The Purchasing Managers Index (PMI) (Figure 1.1) reports at 49.2 for the month of August, the lowest reading since a 49.0 print for November 2011’s activity was reported on December 1, 2011. The previous month’s reading (for July) was 50.1. Consensus estimates for this month’s report were 50.0. The headline risk from this report is that investment banks may reduce forecasts for both Q3 and 2012 full-year GDP in the coming days.
Plain and simple, the figures are disappointing. China is in the midst of a “pause” that is not “refreshing.” Rather confusingly, policy makers are behind the curve in the much needed effort to stimulate growth with further easing measures. Since the July interest rate cut, the PBOC has been on hold despite the lousy data. One reason cited for the conservative stance policy makers are operating with is the end –of-year transition of power from Premier Wen Jiabao to a new Communist Party leadership. However, I do not expect that transfer to continue keeping policy makers on hold, especially if growth decelerates further.
Rather, I expect much of the monetary and fiscal policy inaction since July is tied to advancing policy initiatives in Europe to keep sovereign debt yields benign. Keep in mind, ownership of European government debt by the Chinese has grown significantly since April 2010. If the ECB delivers this month on its summer directive to the markets, I expect further easing measures from the PBOC will quickly be enacted.
I often mention that the value of China’s currency, the yuan (Figure 1.2), matters most for global capital markets and investors. Not surprisingly, the July 25 6.3964 print is the yuan’s low for the year. Subsequent appreciation in the yuan correlates perfectly with a rising S&P 500® Index (SPX) (Figure 1.3) since the end of July. Investors should closely watch the yuan’s direction in the coming weeks.
The strategy remains “the trend is your friend.” What has worked will continue to work. Pressing the overweight button on industrials, materials, and energy is not yet warranted. However, the comfort of a rising yuan suggests those sectors must still be held, just at market weight.
August China PMI internals:
• Output 50.9, down from last month’s 51.8
• New Orders 48.7, down from last month’s 49.0
• New Export Orders 46.6, unchanged from last month’s 46.6
• Imports 47.0, up from last month’s 45.0
• Input Prices 46.1, up from last month’s 41.0
• Inventories of Raw Materials 45.1, down from last month’s 48.5
Figure 1.1 China PMI, November 2007 to September 2012
Figure 1.2 China Yuan Year To Date
Figure 1.3 S&P 500 Index (SPX), July 25, 2012 to September 3, 2012