China’s PMI fell sharply in July as markets await policy support
At a Glance
The sharp decline in China's PMI readings for July reveals a concerning economic trend, with both manufacturing and non-manufacturing indices dipping into contraction territory, as highlighted in the bank's analysis. Per the full note from ing-think, the manufacturing PMI fell to 49.2, significantly below market expectations of 50.1. Given this backdrop, expectations for a policy pivot from authorities are rising, though the path forward may face resistance amid broader macroeconomic challenges.
Key Takeaways
- 01China's manufacturing and non-manufacturing PMIs fell into contraction in July, signaling economic weakness.
- 02Expectations for policy support from the Chinese government are rising in light of disappointing economic indicators.
- 03Ex-factory prices are in contraction, suggesting PPI inflation may have peaked.
- 04The overall sentiment remains cautious as the potential for further macroeconomic slowdown looms.
Full Analysis
What the desk is arguing
The desk frames this as a critical juncture for China’s economic outlook, particularly with disappointing PMI data underscoring a potential continuation of the macro slowdown into the second half of the year. The manufacturing PMI's fall to 49.2, down from 50.3 in June, coupled with a non-manufacturing PMI drop to a 43-month low at 49.0, has triggered heightened expectations for significant policy support.
The decline in both indices signals waning demand and production activity, with significant subcomponents like new orders (48.5) and production (49.6) retreating into contraction. Notably, the persistent contraction in ex-factory prices suggests that PPI inflation has likely peaked, further complicating the reflation narrative the government aims to promote.
Where it sits in our coverage
Our internal consensus on USD/CNY presents a target of 1.075, with a range of 1.04 to 1.12. The positions of several firms reflect varying degrees of optimism on the currency, including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
With the desk's projection aligning closely with jpmorgan and at the higher end of the range, this positions our view in line with a cautious but upwardly optimistic sentiment around USD/CNY, influenced by anticipated easing measures from Chinese policymakers.
How other firms see it
The majority of aligned firms suggest a bearish outlook on the yuan given the recent economic data, indicating a preference for USD appreciation against CNY in the short term. Conversely, some firms, led by bofa, are more pessimistic, projecting a lower target for USD/CNY based on anticipated economic recovery signals.
Traders should also keep an eye on the upcoming shifts in central bank policies, particularly from the People's Bank of China, which could have significant implications for USD/CNY and overall market sentiment as investors gauge the balance between support and economic health.
Market Implications
Traders should watch the 49.0 level in the PMI data, as a sustained trend below this threshold could prompt more aggressive monetary easing from the PBoC. The upcoming Central Bank communications will be pivotal in shaping market expectations around USD/CNY.
From the original
Older quick take Quick take Published 03:23 China China’s PMI fell sharply in July as markets await policy support China’s purchasing managers index came in much softer than expected, with both manufacturing and non-manufacturing PMI slumping into contraction territory. Thi
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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.