China PMI edges higher, but second-quarter slowdown still likely
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's June manufacturing PMI rose to 50.3, surpassing expectations.
- 02Despite the PMI increase, a second-quarter economic slowdown is still anticipated.
- 03Declining ex-factory prices may indicate looming deflationary pressures.
- 04Upcoming Politburo meeting in July could prompt policy support.
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.
Risks to this view
A significant catalyst that could invalidate this cautious outlook would be a marked increase in domestic demand driven by unexpected fiscal stimulus, or an abrupt shift in international market dynamics affecting trade flow into China.
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-quarter slowdown is still likely. Sluggish domestic demand could potentially prompt further policy support, with markets looking ahead to July's Politburo meeting Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lynn Song Chief Economist, Greater China 50.3 China's June manufacturing PMI Higher than expected China's manufacturing PMI rebounds in June China's manufacturing PMI recovered to 50.3 in June, up from 50.0 in May, slightly beating expectations (market: 50.1, ING 50.1) for a smaller bounce. The PMI returned to the same level as April's reading.
Looking at the subindices, we generally saw positive signs in the June data. Encouragingly, new orders hit a 3-month high of 51.2, with export orders recovering to expansion territory at 50.1. Production also edged up to 51.4 on the month.
The price indices showed a notable drop-off in June as energy prices fell. The raw materials purchase price index remained in expansionary territory at 54.2, but it also fell for the third consecutive month. A key subindex to watch is the ex-factory price index.
We saw a surprise move back into contractionary territory at 48.2, the first time in 6 months this subindex has fallen below 50. We’ve seen a reflation trend so far this year, further supported by higher input prices from the war in Iran. But these early signs could indicate that the spectre of deflation hasn't been vanquished quite yet.
Overall, the correlation between the PMI and industrial production data has loosened somewhat in recent years. Yet the slight rebound in the manufacturing PMI is nonetheless favourable for a potential end-of-quarter boost to industrial activity, when it’s published alongside the 2Q GDP data next month. Is China's reflation momentum going to be cut short?
PMI price subindices have been trending downward for a few months Non-manufacturing PMI edges up in June to stay in expansion territory June's non-manufacturing PMI edged up slightly to 50.2, beating market expectations for a drop back into contraction territory (market: 49.9, ING: 49.9) and instead matching a 10-month high. Two subindices were largely responsible for the slight uptick. First, we saw a rebound in new orders, which rose to 48.0 from 45.0.
While remaining in contraction territory for a 38th consecutive month, this was the highest level since December 2024. Second, we had a modest uptick in business expectations, which rose to a 5-month high of 55.3. The other subindices were little changed on the month.
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