Soft PMIs Chill Asian Markets
Asia was suffering a dose of China nerves today after this morning’s Manufacturing, and Non-Manufacturing PMIs disappointed. China’s Manufacturing PMI clung on to expansionary territory, slightly underperforming at 50.1. However, it was the Non-manufacturing PMI that surprised, tumbling from 53.3 to 47.5 for August, well into contractionary territory.
Several factors are at work here. COVID-19 lockdowns in various cities and critical ports sapped domestic consumption, and consumers postponed travel as a result. However, it is likely that the ongoing government clampdowns in multiple sectors, notably student tuition and technology, are impacting both employment concerns in those affected and broader consumer confidence as fears of wider interventions rise. The latter is a fair point, with China announcing more limits on online game time for children and investigating brokerage margin policies.
It seems that new restrictions/investigations/penalties across various economic sectors are happening daily now. I certainly can’t keep up with them. The cultural revolution-lite in China will, at best, limit the upside in China’s asset markets for now. By default, that will spill over to the rest of Asia.
Manufacturing will also be a concern, and a RRR cut will likely occur sooner rather than later. We can probably expect more explicit stimulus from China if the past guides the future and possibly a weaker yuan. That was likely to occur anyway as I believe the US dollar will strengthen in Q4 once the Fed gets tapering.
With Asian FX never far from the yuan event horizon, it is reasonable to surmise the regional currencies, already looking wobbly on a medium-term basis, will suffer by association. When everyone has the same business model, in this case manufacturing consumer goods for the world, pain is jointly felt.
Elsewhere, the picture has been slightly rosier. South Korean Industrial Production rose 0.40% MoM in July, while Japan Industrial Production Mom Prel. fell by 1.50%, less than expected. Looking into the South Korean data, electronics slumped as South Korea grapples with the same chip shortages and supply chain issues as the rest of the world.
Not a case for panic yet, but worth monitoring in future data. Meanwhile, Singapore Bank Lending also expanded strongly in July, suggesting that the vaccinated city-state is well poised to emerge from its Delta battle in good shape.
New Zealand Business Confidence slumped, unsurprisingly, but Australia posted a very healthy Q2 Current Account surplus of AUD 20.50 billion. Private Sector Credit expanded by 0.70% MoM for July also. The current account is likely to bulge even more in Q3 as the state-wide lockdowns erode consumer demand while exports remain robust.
Both the New Zealand and Australian dollars have substantial upside potential in the shorter term if COVID-19 case numbers fall, as both countries appear to be weathering their outbreaks relatively well, at least on a headline basis.
The rest of the day’s calendar is heavy with second-tier data across Asia, and Europe, ahead of the US Chicago PMI and Case-Shiller Home Prices.
The calendar has a lot of noise, but little substance, with the street, now target fixed on Friday’s US Non-Farm Payrolls. Eurozone Inflation is expected to rise to 2.70% YoY, following Germany’s high inflation print yesterday. Only a reading above 3.0% is likely to shake the transitory inflation pillars of the ECB.
Asia will need to negotiate the China Manufacturing and regional PMIs tomorrow and Australian GDP. After the official data today, tomorrow’s China and regional PMIs will assume greater importance. Low readings will see another leg down in Asia stocks and possibly halt the Asia FX rally in its tracks.