China: HSBC manufacturing PMI improves slightly – appears to have bottomed out

In China the flash estimate for HSBC manufacturing PMI in May improved slightly to 49.1 (Consensus: 49.3, DBM: 48.7) from a final reading of 48.9 in April.

The details were relatively strong with new orders improving to 49.3 from 48.9. On a negative note, export orders declined markedly to 46.8 from 50.3 suggesting that the improvement in new orders was driven solely by an improvement in domestic orders. Inventories were cut at a faster pace in May with the finished goods inventory component easing to 49.0 from 49.7 meaning that the new order-inventory balance improved in May. Current output also declined markedly to 48.4 from 50.4 suggesting that new orders are now increasing faster than production.

There were also some signs that the deflationary pressure is easing with the output price component improving to 48.3 from 46.3 (see chart below). For the output price component this is the highest level since August 2014.

The relative strong details in the HSBC manufacturing PMI suggest that the HSBC manufacturing PMI has bottomed out. That said, there is still a considerable gap between the manufacturing PMIs and the hard industrial production data with the hard industrial production data substantially weaker than the manufacturing surveys (see chart below).

Overall today’s HSBC manufacturing PMI supports our view that the Chinese economy will recover moderately in H2 supported by current monetary easing. Hence, the HSBC Markit manufacturing PMI should again improve to above 50 in the coming months. It does not change our view that GDP growth will drop below 7% y/y in Q2 and for that reason we expect to see further monetary easing in the coming months.

In Japan the flash estimate for Markit/JMMA manufacturing PMI in May also improved to 50.9 (consensus: 50.3) from a final reading of 49.9 in April. This is the first improvement since January. The details were also stronger with new orders improving markedly to 51.2 from 48.5. However, also in Japan there was signs of a bit of softness in exports with export orders declining slightly to 50.5 from 51.0 but overall exports are still doing reasonably well. On a positive note, the improvement in new orders appears to be driven mainly by domestic orders. In addition, inventories were cut at a substantially faster pace in May, so the new order-inventory-balance improved markedly in May. So we have a relatively strong signal about further improvement in Japan’s manufacturing PMI in the coming months. With signs that both China's and Japan's manufacturing PMIs are bottoming out, there are tentative signs that the global manufacturing cycle could be stabilising.