Can Chinese PMIs maintain the prospects for economic recovery?

Can Chinese PMIs maintain the prospects for economic recovery? Next week, the Fed meeting on Wednesday will be the main focus of the market. The outcome and the general discourse may determine the mood of the market for the upcoming month.
The Chinese PMI surveys for April will be made public on Tuesday. Following the recent upward GDP surprise for the first quarter of 2024, the market responded favorably. The encouraging headline number, though, obscured the conflicting underlying information. A respectable rise in industrial production was nearly the only factor fueling the economic acceleration.
The consumer sector of the economy is still fragile. This is the main distinction between most economies and the US, where people are still spending heavily even in the face of rising credit card and lending rates. China’s retail sales are still incredibly low.

Government initiatives haven’t yet had a big effect.
House prices are still under pressure, even after a number of initiatives were implemented to boost this industry. The yearly decline was 2.2% as of March 2024, the greatest since August 2015. Consequently, there is a decline in the sales of new homes as buyers are being forced to wait for better deals due to a combination of declining disposable income and decreased expectations for future housing values.

As a result, requests for the PBoC to take more action are growing. It was able to take the market by surprise in February by lowering the 5-year loan prime rate (LPR) to an unprecedented level.

A Fed-dominated week

The market’s focus next week will be firmly on Wednesday’s Fed meeting. Its outcome and the overall rhetoric could dictate market sentiment for the next month.

There will be releases of Chinese PMI surveys. Following the recent upward GDP surprise for the first quarter of 2024, the market responded favorably. The encouraging headline number, though, obscured the conflicting underlying information.

A respectable rise in industrial production was nearly the only factor fueling the economic acceleration.
The consumer sector of the economy is still fragile. This is the main distinction between most economies and the US, where people are still spending heavily even in the face of rising credit card and lending rates. China’s retail sales are still extremely low, a state mostly caused by the country’s failing housing market.

Government measures have not had significant impact yet

Despite several measures put in place to support this sector, house prices remain under pressure. The March 2024 figure showed an annual drop of 2.2%, the highest one since August 2015. As a result, new home sales are going down the drain, as both expectations for lower future house prices and shrinking disposable incomes are forcing buyers to sit on the sidelines for now.

As a result, requests for the PBoC to take more action are growing. It was able to take the market by surprise in February by lowering the 5-year loan prime rate (LPR) to an unprecedented level. This could be the only way out of the present housing problem. This is the benchmark rate for mortgages in China. But a significant barrier exists: China’s reluctance to devalue the currency.
However, if central banks all over the world begin to soften their monetary policy stance, this barrier might be lifted. With market players eagerly awaiting a similar signal from the Fed, the ECB will most likely announce a rate decrease in June, barring a surprise. This is despite the stickiness in inflation that has been present since the beginning of 2024.

Manufacturing PMIs could maintain the current positive momentum

Moving back to the Chinese PMIs, both the national and private manufacturing surveys will be published on Tuesday. The former tends to focus on large state-owned firms, while the latter tends to cover more private and export-oriented corporations. Both are hovering around the 50 threshold, but some positive momentum appears to be building up lately.

The national PMI services poll has a distinct flavor. There is an increasing trend in place after a low point in late 2023, with the print for March 2024 being the strongest since June 2023.
Although it is unlikely to alter public opinion over China’s growth prospects, another strong batch of data on Tuesday would give the market greater confidence. Numerous prominent financial firms have already revised upward their estimates for 2024 growth, and additional revisions may follow if data continues to show improvement in May.

Aussie could get another boost on Tuesday

Following the recent stronger Australian inflation report for the first quarter of 2024, the market is pricing in a small probability of a rate hike during 2024. This looks like an exaggerated reaction but a plethora of positive Chinese data prints, and possibly another PBoC rate cut down the line could really create the conditions of a growth acceleration in the Southern Hemisphere.

The aussie/dollar pair has recorded six consecutive green sessions, quickly climbing to the 0.6520 area. If Tuesday’s data proves positive, the 100-day simple moving average (SMA) at 0.6581 is next in line to be tested. On the other hand, weak Chinese data could cast a shadow on the current Aussie strength and hence cause a small correction towards the 0.6458 level.