Flemming J. Nielsen
Danske Bank A/S
The flash estimate for the HSBC/Markit manufacturing PMI in December declined more than expected to 49.5 (consensus 49.8, our estimate 50.0), down from a final reading of 50.0 in November. This is the lowest level for the HSBC/Markit manufacturing PMI since April 2014.
The details were also weak with new orders declining markedly from 51.3 to 49.6 (also the lowest level since April). However, export orders improved slightly to 51.7 from 51.1. Hence it appears that the weakness in December was driven primarily by weaker domestic demand.
The finished goods inventory component increased marginally from 49.5 to 49.6, while the inventory of purchased components declined marginally from 47.9 to 47.8. Hence, there were no signs of a substantial inventory build-up in December, albeit the new orderinventory balance deteriorated on the back of the decline in new orders. Overall, the level of the new order-inventory balance remains relatively neutral.
The price components suggest continued deflationary pressure, driven largely by lower input prices. The output price component declined from 46.3 to 44.5, while the input price component continued to plunge to 41.9, from 44.7 in November.
The decline in the HSBC/Markit manufacturing PMI in December suggests that the People’s Bank of China’s (PBOC) interest rate cut in November has so far not had any substantial impact on domestic consumption. In our view, in the coming months, China will remain in a moderate monetary easing cycle and we expect the PBoC to cut the reserve requirement for banks by 50bp twice in coming months, with the first cut possible as early as later this month. In our view, the weak PMI also makes another interest rate cut more likely in Q1 15.
Looking ahead, we expect China’s manufacturing PMIs to improve in H1 15 on the back of monetary easing and some improvement in global growth. This said, the weak details in the HSBC/Markit manufacturing PMI admittedly suggest that it could move lower in Q1 15.
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