Article written by Prieur du Plessis, editor of the Investment Postcards from Cape Town blog.
The CFLP Manufacturing PMI fell for the second consecutive month to 52.9 in January from 53.9 in December last year.
| Index: Manufacturing | Seasonal adjusted index | Compared to previous month | Direction |
| PMI | 52.9 | Lower | Expanding |
| Output | 55.3 | Lower | Expanding |
| New Orders | 54.9 | Lower | Expanding |
| New Export Orders | 50.7 | Lower | Expanding |
| Backlogs of Orders | 46.5 | Lower | Contracting |
| Stocks of Finished Goods | 47.9 | Lower | Contracting |
| Purchases of Inputs | 57.7 | Higher | Expanding |
| Imports | 53.0 | Higher | Expanding |
| Input Prices | 69.3 | Higher | Expanding |
| Stocks of Major Inputs | 52.0 | Higher | Expanding |
| Employment | 49.0 | Lower | Contracting |
| Suppliers’ Delivery Time | 49.5 | Lower | Slackening |
Source: Li & Fung.
New export orders slumped by 2.8 to a barely growing 50.7, indicating slower growth in foreign demand. New orders were slightly down by 0.5 to 54.9, indicating that growth in domestic orders held up well despite consumer confidence falling.
Sources: EconStats
The drop in the manufacturing PMI was in line with my expectations based on the seasonal behaviour as well as the timing of the Golden Week starting tomorrow (Feb. 2).
Sources: Li & Fung; Plexus Asset Management.
A major concern to me is the gap that has opened up between the new export orders PMI and the stocks of major inputs PMI.
Sources: Li & Fung; Plexus Asset Management.
Is China finding itself in an overstocked position or is business building strategic positions due to expected supply disruptions as a result of flooding in Australia and South Africa? After all, the ratio of new orders to stocks of finished goods indicates that businesses are not overstocked yet on the factory level.
Sources: Li & Fung; Plexus Asset Management.
It is clear to me that the Chinese have been responsible for the run-up in metal prices since November last year.
Sources: I-Net; Li & Fung; Plexus Asset Management.
Metal prices have been forced to levels exceeding underlying fundamentals such as new export orders.
Sources: I-Net; Li & Fung; Plexus Asset Management.
After all, new export orders are the driving force behind China’s manufacturing industry.
Sources: Li & Fung; Plexus Asset Management.
The three-month moving average of the PMI indicates that China’s GDP growth is still running at approximately 10% on a year-ago basis, indicating that tighter credit conditions are yet to slow the economy materially.
Sources: I-Net; Li & Fung; Plexus Asset Management.
But what can we expect in the coming months?
I expect February’s manufacturing PMI to come in at depressed levels similar to those of January due to the timing of the Golden week and other seasonal factors. However, I expect a strong surge in the PMI in March to 56 – 58 from the current 52.9 – similar to that in 2008:
But what are the markets saying?
It is apparent that the market as measured by the Shanghai Composite Index is an excellent anticipator of the manufacturing PMI as the latter leads the PMI by one month. The Chinese stock market correctly anticipated the weakness in January’s PMI and is currently expecting February’s PMI to come in unchanged from January – in line with my thoughts!
Sources: I-Net; Li & Fung; Plexus Asset Management.
If I am correct the Chinese stock market will at some stage start to anticipate the surge in March’s manufacturing PMI. But will it mean a boon for emerging markets overall?
It is apparent that global bond-market players are focusing on China’s PMI in the pricing of emerging-market bonds. The JP Morgan Emerging Market Bond Yield Spread against US Treasuries has been a useful indicator of China’s manufacturing PMI, especially since the end of 2009 (please note that the axis of the PMI is in reverse order). Over the past two months a major diversion developed. Will it close or is it as a result of the relative de rating of US treasuries? If it is the latter, emerging markets (equities, bonds and currencies) may at some stage over the next few weeks again be favoured by the global investment community.
Sources: I-Net; Li & Fung; Plexus Asset Management.
China Manufacturing PMI falls – an opportunity begging? was first posted on February 1, 2011 at 11:00 am.
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