China PMI edges higher, but second-quarter slowdown still likely
At a Glance
The desk posits that while China's manufacturing PMI has shown some signs of recovery, it does not signal a broader economic turnaround, with potential policy implications stemming from sluggish domestic demand. Per the full note from ING, the June PMI rose to 50.3, slightly better than market expectations of 50.1, yet suggests that a second-quarter slowdown remains probable. This mixed data could lead to expectations for increased policy support ahead of the July Politburo meeting, indicating a more cautious outlook among traders ahead of upcoming policy decisions.
Key Takeaways
Full Analysis
What the desk is arguing
The desk suggests that the PMI rebound, despite being marginal, does not herald a substantial recovery for the Chinese economy. According to the data reported by ING, the new orders index hit a three-month high, yet the broader context of economic inertia suggests that any recovery may be short-lived without concrete policy intervention.
Further, a critical subindex reveals that the ex-factory price index unexpectedly fell into contraction at 48.2, signaling potential deflationary pressures that could impact monetary policy decisions. The desk sees these developments as indicative of a complex economic landscape where recovery could be hampered by ongoing domestic demand challenges.
Where it sits in our coverage
Our consensus target for the CNY (against the USD) sits at 1.075, with a range between 1.04 and 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan's target and sits just below the midpoint of the spread. The desk’s cautious stance on any robust recovery in China dovetails with the prevailing market sentiment about persistent weakness in the economy.
How other firms see it
Overall, firms like jpmorgan and bofa appear to diverge in their assessments, with jpmorgan leaning towards a slightly more optimistic target, while bofa anticipates a weaker CNY. This indicates a split perspective on the implications of the recent PMI data.
Market participants should monitor the upcoming trends in the USD/CNY, especially as the implications of China's policy adjustments are observed in the upcoming quarter.
Market Implications
Traders should keep a close eye on the 1.075 level for the CNY, particularly in light of economic indicators leading into the Politburo meeting. The mixed sentiment around the PMI data could influence positioning in the USD/CNY pair as further policy adjustments are expected.
From the original
Older quick take Quick take 03:27 China China PMI edges higher, but second-quarter slowdown still likely China’s purchasing managers’ index data came in slightly stronger than downbeat expectations, but it doesn't suggest a major turnaround in June and a second-quarte
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The desk interprets China's recent PMI data, which indicates a return to modest growth, as a potential support for the yuan in FX markets. The manufacturing PMI has moved up to 50.1, while non-manufacturing has impressively reached 50.2, suggesting an uptick in economic activity that signals resilience amid a challenging environment. Per the full note from ING, these indices reflect improvements in production and prices, notwithstanding persistent weaknesses in domestic demand. Given the central bank's pivot towards supportive measures, the outlook appears cautiously optimistic.