Chinese PMI feeds the debate – what will risk assets do?

April 1, 2012

FOREX, Global Macro

I’m writing this Sunday night Newcastle time (GMT +10) and I’m guessing that tomorrow mornings open is going to be a pretty good one for the Aussie Dollar and for risk assets. The reason for this is that the Chinese data out over the weekend was not as bad as the Flash Chinese PMI suggested it might have been and as such we might get a bit of a relief rally.

The ANZ economics team covered the release over the weekend and said,

CHINA’S OFFICIAL PMI DISPELS DOUBT ON THE
ECONOMY’S STRENGTH

  • The headline index surged to 53.1 in March, much stronger than market expectations, compared with February’s 51.0. The improvement was across the board.
  • The production index rose strongly to 55.2 from 53.8 previously.
  • The new export orders index improved marginally by 0.8pts to 51.9; the new order index jumped 4.1 pts to 55.1.
  • Input prices gained for the fourth straight month in March, up by 1.9pts to 55.9, largely due to a recent hike in retail fuel prices. Slowly rising input prices also creates an upside risk to China’s PPI in the following months.

ANZ ASSESSMENT
Today’s PMI suggests that China’s manufacturing sector continues to expand, consistent with our view that the economy’s momentum is strengthening.

The link is at the bottom but readers will remember that the flash HSBC PMI had a sobering impact on risk last week. Some pundits, such as Clifford Bennett, noted that this was not the official number and I confess to having dismissed his thoughts at the time based on what I thought was a fairly reasonable relationship between the Flash PMI and the actual, if I can use that word, PMI.

The ANZ includes the chart of this relationship along with a chart of electricity production where you gauge the relationship for yourself, I’ve included it below,

What we have here, from what I can see is a clear divergence in the two Chinese PMI indices.

But the question has to be, which one do you believe represents the Chinese economy? It’s not exactly the longest comparison by which to judge two indicators but if you look at the late 2009 early 2010 period you see that the PMI was reconciled in the HSBC flash PMI’s favour.

But that is hardly going to matter given the China debate that is going on at the moment and which I covered in last Friday’s piece. My guess is that the bulls in the China shop will have the upper hand for a few days and that this will help risk assets.

Update: Bloomberg however is taking a different view, Monday morning running an article which says,

A stronger reading for a Chinese manufacturing gauge failed to end predictions for policy loosening as analysts described the gain as seasonal and a separate survey showed exporters struggling…
“The rebound in the government PMI is purely seasonal,” said Joy Yang, chief China economist at Mirae Asset Securities (HK) Ltd., who previously worked at the IMF. “Flexible and paced easing” is needed, she said.

The government-backed PMI is skewed toward large enterprises and affected by seasonality, with the gauge climbing an average of 3.2 points each March from 2005 to 2011 as production returned to normal after a Lunar New Year holiday, HSBC said in a note. The latest number was higher than analysts’ median estimate of 50.8.

Potentially also helping risk assets is an indicator we watch closely as to the health, or otherwise of the US economy. On Friday the ECRI leading Index got back to the zero line showing the 11th straight week of improvement in the outlook for the US economy. I watch Doug Short’s updates on this every week and his take is always worth catching, but here is the chart which shows the very distinct improvement in the outlook for the US economy.

Now readers know I have a jaundice view of the longer term ability of the US economy to keep up its current trajectory and here is a nice summation of one of the reasons why – but from a short term market sense these misgivings will be overcome with an excuse to reverse the recent negative sentiment on China.

From a market perspective there seems to be not as much participation in the equity rally as one would expect of a bull market of this vintage so there is room for further upside particularly given the techincals aren’t terrible as you can see in the chart below.

According to many sources I’ve read over the past couple of days this magnificent rally of Q1 2012 for US equities is one for the ages – best since 1998, but no one seems to have participated. Bull rallies, as they say, climb a wall of worry. but at +11%, when I was expecting around +10% only for the year I guess I’m either going to be dead wrong or this is time to take money off the table.

Depending on your time frame though both outlooks could be right as we saw through the year that was 2011 and you know what my bias is from my piece on the bond market rally from last week. So as bonds get smashed, as they have in Q1 2012, markets worry about the outlook for the economy in a positive sense and equities rally, or hold up, in a self reinforcing loop. But if Bernanke is out there warning us we should probably not get too far ahead in discounting the positivity of the future – perhaps we should listen?

Anyway looking at the Australian market, the Australian Dollar and RBA rate decision this week I’m thinking the Chinese data reduces the chance of a cut in Australia below already expected levels for April but it should buoy the Aussie Dollar a little in the early part of this week.

As I wrote last week the Aussie Dollars candlestick pattern was a bullish reversal Thursday night for the short term and the market position from the CFTC commitment of traders report tells us that the rangey nature of this market has the short term guys probably more flat than skewed either way – so they will run with the pulse.

So even thought the chart above suggests the Aussie Dollar’s march sell-off has further downside there is nothing to stop a shorter term reversal. Indeed I have a new, old, line on the Aussie Dollar chart that might be support for the bounce idea.

We’ll see hey.

I am looking forward to the next few days trade before Easter because it will tell us a lot about where the market is positioned and what it believes.

My view hasn’t changed though.

Have a great day

Gregory McKenna

www.twitter.com/gregorymckenna

From the ANZ: Greater China Data Alert–China Official PMI Dispels Doubts on Growth – 1 April 2012

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au ;

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  1. Australian Dollar Outlook – bulls on the run | Lighthouse Securities - April 4, 2012

    […] the Chinese PMI bounce faded quickly for the Aussie Dollar didn’t it. As I said on Sunday/Monday, I am looking forward to the next few days trade before Easter because it will tell us a lot about […]

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