China’s PMI’s are especially interesting this time around because it’s the first survey since it became known that the US and China had tentatively reached an agreement about the ongoing trade war.
Of course, it’s not a done deal. In fact, just yesterday US trade representatives were hinting that everything might not be in place by the time Trump and Xi meet at the APEC conference, which is in the process of being relocated.
However, the optimism might be enough to influence Chinese firms and their outlook. The Caixin survey is more relevant than the NBS one. This is because it covers a larger number of companies, which means it has less influence from state enterprises.
Lately, it has been outperforming the official government survey. We can often explain this by smaller private businesses having more flexibility to navigate the uncertainty of the trade war.
What We Are Looking For
There is only one major data point coming out of China tomorrow. That’s likely to be the biggest mover of the markets in the Far East, including the AUD and NZD.
The consensus of economists is for the Caixin Manufacturing PMI to decline a bit to 50.8 from 51.4 in September. Still in expansion for the third consecutive month, but also somewhat borderline.
Earlier this morning, the NBS reported the official Manufacturing PMI. This disappointed at 49.3 compared to the expectation of 49.8. In fact, both official PMIs came in below expectations, with non-manufacturing at 52.8 compared to 53.6 expected.
Although the important manufacturing component remains in contraction, it’s still borderline. The result would only heighten the expectation that the Caixin version will also be lower than the prior month.
Why Not so Much Optimism?
Most markets have reacted with cautious optimism to the announcement that US and Chinese negotiators are working on a “Phase 1” deal.
While the possibility of a trade deal might be enough to get equities traders to buy, nothing has changed yet. Tariffs are still in place, with the consequent impact on businesses.
This wouldn’t be the first time we almost had a deal, only for it to fall through at the last moment. Purchasing managers cannot responsibly go about increasing corporate spending until we get signatures on a deal and actual policy changes.
So, the expectations component of the PMI survey might improve, but the current situation is likely to remain as bleak as before.
The Market Reaction
After we got the disappointing third-quarter GDP print of just 6.0%, the markets are desperate for some good news.
There is a higher chance of a strong reaction if we get a beat in expectations than with a disappointment. A drop below 50 would confirm an already pessimistic view of the markets; one that has been developing as Chinese firms report their third-quarter earnings underperforming compared to last year.
Australia is more likely to be affected by Manufacturing PMI than New Zealand because they supply primarily raw materials to the Asian giant. A return to negative industrial growth would be a bad sign for the AUD. A significantly better than expected print would give hope for more Chinese buying, and support the AUD as well as JPY.