Traditionally, PMI reports at the start of the month tend to move the market around risk appetite. But there is likely to be a renewed focus on China’s double readings later this week. That’s because it’s the first leading indicator to cover a period after the announcement of the massive stimulus back in September.
Investors will be looking closely at both the official and private PMI measures coming out on Thursday and Friday to see if businesses are responding positively to the government’s announcements. A strong move higher in business sentiment could help propel commodity currencies and even potentially give some support to the yen. But a disappointment could lead to a retracement of gains and a return of pessimism across the market. Oil could be particularly vulnerable, as China is the largest importer, and it started the week on the backfoot after easing tensions in the Middle East.
The Difference in the Measures
Last month, China’s official and private measures of manufacturing activity stayed in contraction by a small margin. The services sector was in expansion by the bare minimum, suggesting a broad reach of general malaise in the economy. Those measures didn’t include the effect of the stimulus measures, although there was quite a lot of speculation that the conditions had reached a point that the central government would have to respond.
What could be important for the markets is if there is a difference between the National Bureau of Statistics’ (NBS) official reading, and the private survey conducted by Caixin, which comes out a day later. That’s because the official measure is concentrated on the large, mostly state-owned firms. Presumably, they would benefit more from state-backed stimulus. Caixin includes a broader range of smaller businesses with more exposure to exports. This is why, for example, earlier in the year Caixin was in expansion while NBS was not. Smaller companies were able to take advantage of a growing export market, while bigger companies were bogged down in the slowing domestic market.
What the Predictions Say
The consensus among analysts is that the official NBS October Manufacturing PMI will pop back into expansion at 50.2, up from 49.8 prior. That is a relatively small move, though psychologically crucial as it goes over the 50 barrier. Given the context of the size of the stimulus, a small improvement in manufacturing PMI might end up disappointing investors. The non-manufacturing PMI measure is expected to advance further into contraction by a relatively small amount to 50.3 from 50.0.
The private measure comes out on Friday, and is expected to show that Caixin October manufacturing PMI will stay in contraction at 49.7, but improve from 49.3 prior. The relative small move that is forecast mirrors the magnitude of the official measure, suggesting that analysts believe both private and public companies will see a similar, albeit modest, improvement.
China reported earlier that GDP growth in the third quarter was below target. The next step is for the National People’s Congress to approve more concrete measures, potentially to be announced this week. If that announcement provides the granularity that investors have said has been missing from prior stimulus announcements, then investor sentiment could see a boost.
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