Market will release the flash manufacturing Purchasing Managers' Index (PMI) for China and Euro Zone this week, and the outcome is likely to show some divergent moves between the two regions.
Chinese economy has been stabilized since early second quarter this year. The growth pickup in the second quarter was largely benefited by various easing measures, such as rural banks reserve ratio cut, liquidity injection and railway infrastructure building. The officials have made the statement clearly that the growth target for 2014 will remain at around 7.5%. This supports the view that the targeted currency stimulus will continue on and further more aggressive measures shouldn't be ruled out in achieving the 7.5% growth rate in the next six months. Below is the chart for the quarterly growth numbers in 2013, and we noticed that the base of the second half last year was higher.
Hence, the economy may not be able to achieve a 7.5% Y/Y growth in the next six months without various policy supports. Government is unlikely to ignore the recent falling of housing prices, but introducing more easing measures by offering a "bottom" to the property prices, otherwise it will bring a huge risk for the short-term in the Chinese economy. The surge of lending data in June could support this view. Monthly banks' lending rose to 1080 billion Yuan and the aggregate lending nearly hit the level of 2000 billion Yuan. The country could also start issuing Mortgage Backed Securities to revive the property market, after majority of the cities' housing prices dropped.
In other words, "pro-growth" measures continue and it is likely to lead the manufacturing activities much higher this month. New Orders, Output continues to rise in June, suggesting that the uptrend since April hasn't ended yet. The flash reading could reach around level 51.
However, manufacturing PMIs in the Euro zone could continue to stay in the downtrend which formed since beginning of the year although it could be staying in the expansion territory in the rest of the year. Euro Zone manufacturing PMI dropped to 51.8 in June from 52.2 in May. Recent falling of the single currency is not sufficient to boost the fading corporate confidence, while the regional geopolitical risk escalated after the Malaysian Airline jet was shot down. Germany is Russia's second largest trading partner by end of 2013, further sanction on Russia is not a positive news on the economic point of view for EU. Besides that, German IFO Survey may fall as well in a few days; if so, it implies the Germany is unlikely to lead the entire Euro zone 2Q Gross Domestic Product (GDP)higher such as in 1Q.
We like to overweigh on AUD and NZD this week on a possible sound China PMI, and high possibility on the Reserve Bank of New Zealand (RBNZ) to hike the Official Cash Rate (OCR) to 3.5%. On the other side, we would underweight the EURO for the short term when the economic releases are likely to suggest more easing from the European Central Bank (ECB) is needed.
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