A Look At Futures Action: A Weak Seasonally Adjusted Chinese And European PMI, First Negative 2010 ADP, And More
A weak seasonally adjusted PMI number out of China did nothing, as expected, for Chinese stocks, but was enough to push US futures up an entire point overnight, as any data now is enough to send the computers into a feeding frenzy. Additionally the trend of declining European data continues, with an even starker contrast between core and the periphery: EU PMI came in at 55.1 compared to 56.7 previously and the lowest since February 2010, yet what is interesting is that German PMI came on top of expectations (and again the lowest since february at 58.2), while Italy missed by a mile at 52.8 on expectations of some growth from the previous print of 54.5. As for Greece - forget about it: its PMI was 43, compared to 45.3 in July, on steep falls in output and new orders, as austerity continues to extract its pound of flesh. Yet it is all about the AUDJPY, which at least up until the completely worthless and irrelevant ADP report came in at -10,000 on expectations of +17,000 (and, gee, the previous was again revised lower from 42k to 37k, hopefully this is not an indicator of what to expect this Friday, as this was the first decrease in private payrolls since January 2010) was up by about 150 pips. So why is the AUDJPY flying? In addition to some better than expected Aussie GDP data, which is nothing but a second derivative on the Chinese economy, one should actually ask the forward looking question: what is really going on in China? And here is Goldman explaining why the Chinese PMI number, despite what Doug Kass would like to tweet, actually confirms an ongoing slow down in mainland China.
From Goldman Sachs Global ECS Research:
China’s official Purchasing Managers’ Index (PMI), co-compiled by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP), rose to 51.7% in August from 51.2% in July.
Despite the fact that it is claimed to be seasonally adjusted, historical headline PMI data showed clear seasonality. Its August readings tend to be higher than its July readings. After adjusting for this seasonality, the PMI was largely flat in August (down by less than 0.1 percentage point).
Among the sub-indices of the PMI (data mentioned below are after re-adjustment for seasonality, see Exhibit 3 for full breakdowns):
- The production sub-index fell to 54.8% in August from 55.4% in July.
- The new orders index rose to 55.0% in August from 53.9% in July.
- The new export orders index remained unchanged at 51.6%.
- The imports index was down to 49.1% in August from 50.9% in July.
- The employment sub-index went down to 50.8% in August from 51.5% in July.
- The input price sub-index continued to rise to 57.8% in August from 49.4% in July.
- The raw materials inventory index fell to 47.7% in August from 48.1% in July.
- The finished goods inventory index, which is a reverse index that tends to fall when the growth accelerates, fell by 1.4 percentage point.
The August PMI headline reading suggests manufacturing activity growth remains significantly below its trend level (though there is no major further slowdown like the one that happened in late-2008). The further moderation in the production and imports sub-indices also suggesting actual growth continued to be weak in August. However, 1) the seasonality of the official PMI is not necessarily consistent which means we cannot fully rely on the PMI in judging the strength of activity growth. Other more anecdotal information seems to be more encouraging (e.g., the pace of investments especially in inland provinces probably accelerated. Though this information need to be treated with a big grain of salt too). We need to see industrial production (IP) data, which is due September 13, to get a better sense about actual growth in August. If IP data does confirm the continued weakness as suggested by today’s PMI data, we see more downside risks to our 10.1% 2010 GDP growth forecast. 2) The new orders sub-index started to improve modestly which may signal a rebound in activity growth in the near future. Interestingly, despite heightened concerns about growth in many parts of the world, the export new orders sub-index has not shown any clear downward trend since March.
Also worthwhile noting is the dramatic rebound in the input price index in August. This rebound is consistent with the rise in domestic commodity prices in recent weeks, especially in terms of steel prices, and may translate into a rebound in sequential PPI inflation with a short lag (typically a month). Higher inflation (CPI is also expected rise in August judging from the high frequency food price data compiled by the ministries of agriculture and commerce) may further complicate policy making as policy makers may feel it is difficult to loosen policy to stimulate growth. However, we expect the strength in inflation data to be temporary and by 4Q2010 the growth-inflation combination will likely to be one with lower yoy growth and falling inflation which will push policy makers to (quietly) loosen policy further. If a more-thanexpected slowdown in exports growth occurs in the coming months, a more decisive stimulus package will be needed and likely adopted.