Chief China Strategist
Summary: China’s official NBS manufacturing PMI released on Sunday July 31 surprised to the downside and declined to 49.0, back to the contractionary territory (vs consensus: 50.3; June: 50.2). The manufacturing output sub-index and manufacturing new order sub-index were both in contraction, coming at 49.8 and 48.5 respectively. Exports new orders sub-index fell 2.1 points to 47.4.
China’s official NBS manufacturing PMI expectedly dropped to 49.0, much weaker than the consensus expectation of 50.3 and 1.2 point lower from June. It is important to note that all the 13 major sub-indices of the manufacturing PMI fell in July from June and 10 of the 13 below the 50-threshold, indicating contraction. After bouncing in June as many cities reopened from Covid-related lockdown, manufacturing activities across the board declined. Most notably, from June to July, manufacturing output sub-index fell from 52.8 to 49.8, new orders sub-index from 50.4 to 48.5, new export orders sub-index from 49.5 to 47.4, imports sub-index from 49.2 to 46.9, employment sub-index from 48.7 to 48.6, purchase quantity sub-index from 51.1 to 48.9 and open orders sub-index from 44.2 to 42.6.
The weakness was among enterprises from small to large sizes
The weakness spread across large, medium-size and small enterprises, all having fallen sequentially and coming at 49.8, 48.5 and 47.9 respectively. The drop among medium-sized enterprises was particularly drastic, falling 2.8 points from 51.3 in June to 48.5 in July.
Inflation of factory gate prices continued to abate as the producer price sub-index of the manufacturing PMI survey fell from 46.3 in June to 40.1 in July, the third consecutive month in the contractionary territory. The input price sub-index plunged 11.6 point from 52.0 in June to 40.4 in July.
Non-manufacturing PMI came at 53.8 largely in-line with expectations for July (vs consensus: 53.9; June: 54.7). The services sub-index of the non-manufacturing PMI moderated slightly to 52.8 in July, from 54.3 in June but it stood in the expansionary territory. Air transportation, catering, lodging, environment protection and public facility management components came at above 60, indicating relatively strong expansion in support to the services sector.
The construction sub-index of the non-manufacturing PMI surges 2.6 point to 59.2, indicating strong expansion. The strong performance was largely due to the rolling-out of infrastructure construction projects.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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