Given what’s been going on in China lately, there will be a lot of attention on the upcoming Chinese PMIs. Not only because China is likely to drive (or drag on) the global economy, but sentiment can drive commodity currencies like the Aussie, Kiwi and even the Loonie. A faltering Chinese economy could weigh on the yen and Euro, as exports could slow.
Over the last month, the Chinese government has been scrambling to offer more stimulus for the economy. The main problem is still the housing sector, which is particularly relevant to the Aussie. But the economic doldrums have spread through most of the economy. And it seems that the Chinese government is keener to prop up the high technology sector than housing.
What to look out for
Therefore, markets will be very interested to see if this stimulus is having any effect on businesses. PMI is the most sensitive indicator for business outlook, since it reflects how much demand there is for products and services. It’s also the “fastest” data that’s released on the economy, since the survey is released at the start of the month, before other indicators such as retails sales or even jobs numbers.
Markets have seen thin trading lately, and there seems to be considerable pent-up nervousness. That means that if China’s PMI disappoints, it could open the floodgates for a large swing towards risk-off. That might help push gold higher and reaffirm the dollar that has suffered a bit due to the latest jobs data.
What could turn things around
On the other hand, a surprise to the upside could substantially reassure markets headed into the crucial Labor Day weekend. Often markets tend to be in the red through September as the summer euphoria wanes. Given the recent market underperformance, if there is some good data this week, it might help convince investors that an upswing is finally in the cards.
Though we must have some caution in evaluating the PMIs in context. The first to be released in the official, government-conducted NBS version, which covers a smaller selection of mostly state-run companies. These will likely be in a better position than smaller, private firms. So, the initial reaction to the PMI data might be a little more cautious. The private survey which comes out on Friday could have a bigger impact on the markets, if it deviates more from expectations.
What the predictions are
China NBS Manufacturing PMI is forecast to stay marginally in contraction and see a slight improvement to 49.5 compared to 49.3 prior. This could be seen as beneficial for the markets, because staying slightly in contraction might not spook investors. But it could increase pressure on the government to step up even more stimulus, which markets would approve of and could react positively towards.
The private Caixin Manufacturing PMI survey is also expected to remain in contraction, slightly lower at 49.3 compared to 49.2 prior. That’s essentially unchanged, given the very small difference. A discrepancy between the NBS and Caixin could end up worrying markets even more as it could suggest that dynamism in the market is only just starting to falter. This is because smaller companies typically see a negative situation before larger ones.
