Monday starts off with one of the major data dumps for next week, with the release of the private measure of China’s PMI and US ISM PMI, both for the manufacturing sector. This is crucial data under the circumstances. Markets are looking for signs that energy costs are being passed on to consumers. These are the much-talked about “second round effects” as they are called by central bankers.
Additionally, as the world’s two largest economies, the economic growth outlook offered by the PMI data is vital for the Forex market. Both China and the US’ economy disappointed last quarter. However, they can lead to very different results. Markets are expecting a renewed push for stimulus in China, which could impact commodity currencies. In the US, traders are wondering if the Fed will actually manage a rate hike this year. This could drag on dollar pairs.
What the Market is Looking For
On Friday, China’s official, government-compiled Manufacturing PMi surprised by falling into contraction at 49.2, a full point below the 50.2 that was the consensus expectation. Markets will be looking to Monday’s release of the private RatingDog (former Caixin) Manufacturing PMI, anticipated to stay in expansion at 51.5, down from 51.7 in June. The measures are slightly different. Therefore, it’s possible that they will show different results, but that difference could be the key.
RatingDog surveys a larger share of smaller, export oriented companies, and they could outperform the major, domestic-facing state-owned companies that make the core of the NBS results. The difference would likely imply easing of the domestic market compared to still vibrant trade and global economy. It could add to pressure on the central government to inject stimulus. This would be broadly favourable for commodity currencies. However, a disappointment could leave markets more worried about the global economy, punishing emerging markets and commodity currencies in the process.
US Growth Falters, What About the Fed?
A few hours later is the release of US ISM manufacturing PMI for June, projected to dip to 53.0 from 53.3 previously, staying well into expansion. Unless there is a major deviation from expectations, markets will likely be more interested in the prices paid component. They want to get a better understanding of inflationary pressure.
While at first blush this might look like the US economy is roaring ahead compared to China’s, the surveys use different methodologies even if they are measuring essentially the same thing. What’s a more immediate concern for markets is if the US economy continues to slow.
The Market Outlook
The main takeaway from the Fed meeting is that there is growing unease about the Fed’s outlook. Although Chair Keven Warsh stuck to his hawkish rhetoric, markets seem to be calling his bluff. After all, if he’s so adamant about bringing down inflation, why hasn’t he acted already?
Warsh’s unwillingness to more concretely signal a rate hike in September left markets punishing the dollar, worried that the Fed will be slow to bring inflation in line. If PMIs show price pressures remain, that trend might be exacerbated.
