Markets will be looking closely at Wednesday’s release of PMI figures, with China and Europe top of mind for many traders. The data provides the most up-to-date snapshot of the economic situation in each country, which could become a particularly important metric if the Iran war persists or deepens. China has been spending massively to stimulate its domestic economy, and it could be the most affected by the conflict.
As central banks normalise interest rates, economic performance is becoming one of the key metrics for predicting future monetary policy moves. As central banks diverge on policy, their respective currencies are expected to have long-term shifts. Given the level of uncertainty amid the tariff situation after the US Supreme Court ruling (remember that?) and the war in Iran, the data could provide some relief with its predictability.
China’s Economy in the Balance
China is the world’s largest importer of crude, and was Iran’s biggest customer. With the ongoing war, China has lost another one of its key suppliers. In January, the US incursion to capture Venezuela’s Maduro put that country’s crude supply under American control. While the US has continued to allow the sale of Venezuelan oil to China, it makes the Asian nation more vulnerable. With the Strait of Hormuz closed, crude prices are expected to rise, with some analysts pointing to ceilings of as much as $110 for Brent.
This could place a particular financial strain on China, as it has to import oil and become more reliant on Russian imports. It also provides a strategic advantage to the US ahead of key talks between US President Donald Trump and President Xi Jinping, expected at the end of the month. The two nations have a fragile trade truce, with China previously wielding its dominance over rare-earth supplies. The increasing US control of oil producers gives Trump another negotiation card.
Time for a Status Check
The upcoming PMI surveys were, of course, conducted before the war in Iran, so they can provide the market with a baseline against which to compare the potential impact. A stronger Chinese economy would help mitigate the effects of the war, and by extension, potentially support commodity currencies. However, a downturn could exacerbate traders’ worries and drag on commodity and trade currencies, while also providing another boost to safe havens.
China’s official NBS February manufacturing PMI is expected stay just below expansion at 49.9, but improve from the 49.3 reported in January. Meanwhile, the private measure covering a broader set of smaller, export-oriented companies is expected to continue expanding. The RatingDog February manufacturing PMI is expected to tick up to 50.5 from 50.3 previously.
Europe’s Economy Slowly Taking Off
The situation for Europe is a little different, with the ECB previously worried that a strong Euro could lead to deflationary pressure. The potential for inflation from higher energy prices due to the conflict in Iran could mitigate that problem, allowing the ECB to keep rates unchanged for longer. An acceleration in the Eurozone Economy would likely continue to support the Euro.
The Final Eurozone February composite PMI is expected to be confirmed at 51.9, up from 51.3 in January. The gains are seen largely thanks to a recovery in the manufacturing sector. However, that was partially due to lower energy prices amid warmer weather in February. Those gains could be reversed in March if crude prices remain elevated for a prolonged period.