Global Growth to Face Flash PMI Test

With investors growing increasingly jittery over China’s economic performance of late, the October HSBC/Markit flash purchasing managers’ index (PMI) due on Thursday is one traders will want to pay heed.

In general, manufacturing PMIs are surveys posed to managers that answer questions regarding employment, production, new orders, prices, supplier deliveries and inventories. The size of the sample varies on the region, the organization administering the survey, and if it’s an advanced (flash) or the final tally of participating managers’ answers.

Concerning the final count on the October PMI reading in the world’s second-biggest economy, it could spur the People’s Bank of China (PBoC) to pump more stimulus into the market if factory activity shows signs of slowing down.

China’s Growth Party Is Over

China’s August flash PMI was a disappointment. With September’s numbers coming in slightly above expectations, you could hear investors around the world breathe a sigh of relief. The September preliminary reading was 50.5 — barely above the 50.00 mark which is considered an expansion. The final reading for September came in at the same level reported in August, 50.2, the worst reading in three months. The Chinese slowdown has hit commodity markets especially hard this year. Lower demand for energy and an oversupply of other commodities has pushed even uncorrelated instruments such as metals down. The official PMI is close to the private reading at 51.1 and at the level expected by economists.

China’s gross domestic product (GDP) figures for the third quarter were announced this week. A reading of 7.3% would be the envy of developed markets, but for China it is the worst reading since 2009, and it confirms the country is growing at a slower pace. The positive was that the PBoC did not have to deploy a massive stimulus package to beat expectations but rather a mini-stimulus. There is some optimism in the market that the Fourth Plenum, the four-day meeting of China’s powerful Communist Party Central Committee underway this week, will provide some insights in to how the government is planning to address challenges to growth and the rule of law in an effort to fight corruption.

The Chinese economy remains resilient despite some concerns in the housing and banking sectors. Stimulus and reforms have been targeted to deal with those issues and so far the results have been positive but not positive enough to reverse the downward trend in Chinese GDP.

Strong Economic Headwinds Gust in the Eurozone

The engine driving European growth appears to be stalling. Germany’s flash PMI was the main talking point above both a Chinese and a French upgrade. Given the importance of the German economy for the wellbeing of the eurozone, the market was not expecting a drop in the manufacturing PMI to 49.9. Expectations have now been adjusted accordingly and further cuts are anticipated for Thursday’s advanced report.

The PMI drop in Germany was enough to press the composite European PMI to 51.7 after a previous reading of 52.

The latest German ZEW Economic Sentiment was pessimistic and the word ‘recession’ is back in play for Europe’s strongest economy. A weak PMI will put further pressure on the government to change its mind about austerity programs as other eurozone nations urge for a move to a more stimulus-driven monetary policy.

In an ironic turn of events, the French manufacturing PMI beat expectations to the upside in September. After touching a low of 46.5 in August, the market was awaiting a small recovery but the French figures outperformed by reaching a reading of 48.8. Though French figures are still pointing to a contraction as they are below a reading of 50, they are doing so at a slower pace. That is good news but it’s nothing to get too excited about, especially if the German sentiment is negative, and there is no speedy consensus in Berlin as to how to address it.