After the very weak result in February (largely a result of Chinese New Year holiday distortions - albeit consistent with our view that growth slows this year), the March results showed a stark, and somewhat predictable rebound. Certainly at the very least the results show that China's economy is largely stable if not a little slower - certainly not falling off a cliff like the February numbers might have suggested. Yet the combined Feb/March numbers remain consistent with the thesis of stable yet slower growth.
On the numbers, the March official manufacturing PMI for China was 51.5 (vs 50.5 expected, 50.3 previous) and the non-manufacturing PMI at 54.6 (54.5 consensus, 54.4 previous). Within the detail, on the manufacturing side, large firms (mostly SOEs) were up +0.2pts to 52.4, medium firms up +1.4pts to 50.4, and small firms surged +5.3 pts to 50.1, which represents a sharp improvement. In the non-manufacturing survey, services were off -0.2pts to 53.6 whereas construction was up +3.2pts to 60.7. The strength in the construction industry is interesting given how the outlook for China property prices has been deteriorating.
Overall, the rebound in the PMI is somewhat reassuring in that it confirms the February result was distorted. Yet the overall softer momentum on a combined 3-month average shows a slowing trend. This slowing trend lines up with the rollover in copper prices, and hence elevates this theme on the risk radar.
The important points to note on the China macro view and outlook for copper prices are:
- The China PMIs rebounded in March off of the distorted February lows.
- Yet the smoothed combined PMI softened further and lines up with the thesis that China's economy slows this year and also lines up with the rollover in copper prices.
- The rolling over of copper prices and Chinese bond yields is a concerning sign and something to keep an eye on, likewise the softening in the CCFI.
1. China PMIs and Copper: While both the manufacturing and non-manufacturing PMIs rebounded in March, it was not enough to lift the combined moving average of the two indexes, and thus we can see the apparent loss of momentum recently remains in play. It also lines up with what's been happening with the copper price, which has likewise rolled over. We recently highlighted the downside risks for copper in a report. It goes to show how important the China macro view is alongside global commodity prices.
2. Copper, China, and Bond Yields: Looking closer at China macro and copper, and also bringing in the bond yields aspect, the pair of charts below presents an interesting, if concerning picture on the global macro backdrop. It appears to show copper prices rolling over alongside China 10-year government bond yields, while on the other hand US 10-year government bond yields also appear to be rolling over along with the copper/gold ratio. I continue to run a constructive view on the global economic outlook this year, but you need to pay attention when prices get on the move, particularly in important macro markets like these.
3. Copper and the CCFI: The CCFI (China Containerized Freight Index) is a measure of shipping costs for Chinese goods exports, think of it as similar to the "Baltic Dry Index" but more for general goods vs bulk commodities in that example. Anyway, this indicator will move around based on supply of shipping, shipping input costs such as energy prices, and most interestingly - changes in demand/volumes. So while there are other factors that can influence it, being linked to global trade demand makes this a must-watch indicator. Thus when we see this indicator falling off, and seemingly diverging to the downside vs copper it raises questions on the macro outlook, and at the very least highlights downside risks for Copper prices.
