Doubt Chinese Data, but Its Stronger-than-Expected PMI Lifts Risk Assets

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Marc Chandler
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Overview: Many investors may be skeptical of the accuracy of Chinese data, but its stronger than expected February PMI animated the animal spirits and bolstered risk-taking appetites. Asia Pacific equities jumped, led by the 4.2% rally in Hong Kong and a 5% surge in the index that tracks mainland shares. Among the long bourses Australia and Singapore slipped, and South Korean markets were closed for a national holiday. Europe's Stoxx 600 is posting a small gain and US index futures are trading higher. European 10-year yields are mostly 5-6 bp higher, though UK Gilts are bucking the move and the 10-year yield is a little softer. The US 10-year Treasury yield is firm near 3.94%.

The dollar is broadly lower. The New Zealand dollar is leading the charge with a 1% gain, followed by the euro, which is up around 0.75% near $1.0665. Sterling is little changed and at the bottom of the G10 performers today. Nearly all the emerging market currencies are higher, save the Russian rouble and Taiwanese dollar. The Mexican peso rose to new five-year highs and the Chinese yuan is posting its largest gain of the year. Gold posted a key upside reversal yesterday and is extending its gains today. It is reached a five-day high near $1838. April WTI initially is trading inside yesterday's range and is pulled between the China re-opening meme and the continued build of US supplies, which API estimated rose for the tenth consecutive week.

Asia Pacific

China's February PMI jumped more than expected, strengthening the recovery meme, and bolstering risk appetites more broadly. The manufacturing PMI rose to 52.6 from 50.1, which is highest in a decade. The non-manufacturing PMI increased to 56.3 from 54.4, just below the high set in November 2020. This saw the composite rise to 56.4 from 52.9, a new high. The Caixin manufacturing PMI was somewhat less impressive, rising to 51.6 from 49.2 and is seen reflecting a subdued export performance.

Yesterday, Japan reported a stunning 4.6% drop in January industrial output. Only one economist in Bloomberg's survey of 28 economist had anticipated a larger contraction. The final February manufacturing PMI stood at 47.7, up from the flash estimate of 47.4, which was the weakest since August 2020. It has not posted a monthly increase since last March. In January it was 48.9, unchanged from December 2022. 

Australia's economy expanded by a solid even if not spectacular 0.5% in Q4 22. That follows a 0.7% expansion in Q3. Although Q4 growth was a little less than expected, the year-over-year rate was in line at 2.7%. Separately, Australia reported its newly minted monthly inflation report. January prices slowed to 7.4% year-over-year from 8.4% at the end of last year. This was a larger drop than expected, and initially weighed on the Australian dollar. The RBA sees it falling to 4.8% by the end this year. The median forecast in Bloomberg's survey is not as sanguine as sees a 5.4% pace. Lastly, the final February manufacturing PMI came in at 50.5, up from the flash reading of 50.1. This is the third consecutive month that it hovered around 50 without break below.

The dollar was turned back from the JPY137 area yesterday and settled near JPY136.15. The heavier greenback tone saw it slip marginal through yesterday's lows to almost JPY135.60 today. The intraday momentum indicators are stretched and nearby support around JPY135.40-50 may hold, with the help of firmer rates in Europe and the US. The Australian dollar is recovering smartly after making a marginal new low (since early January) near $0.6695. It has risen through yesterday's high (~$0.6760) and a close above there could be a bullish key reversal. Nearby resistance is seen around $0.6800. Initial support is around $0.6750. The Chinese yuan surged after the PMI reports. The dollar peaked Monday near CNY6.9730 reached CNY6.8790 today, a six-day low. It is the third day the greenback has fallen, which halted a four-day rally seen last week. Today's loss, if sustained, would be the largest this year. The PBOC set the dollar's reference rate slightly below expectations (CNY6.9400 vs. CNY6.9411, the median forecast in Bloomberg's survey. 

Europe

The eurozone's final manufacturing PMI was unchanged at 48.5.  Germany's was revised lower to 46.3 from 46.5.  It was at 47.3 in January and the February reading was the first decline in four months. The French reading was also revised down to 47.4 from the flash reading of 47.9.  In January it was above 50 (at 50.5) for the first time since last August. Italy's manufacturing PMI jumped to 52.0 from 50.4 and was better than expected. The same is true of Spain, where the manufacturing PMI rose to 50.7 from 48.4.  It is the highest since last June.

Separately, Germany reported a 2k rise in unemployment last month. The market had looked for aa 10k decline, and January's 22k fall was halved. The unemployment rate was unchanged at 5.5%. German states have reported the February CPI figures and the national estimate will be out shortly. The EU harmonized measure is seen rising by 0.5% month-over-month for a 9.0% year-over-year increase, after a 9.2% rate in January. Recall Spain and France surprised on the upside yesterday. The aggregate report for the eurozone is due tomorrow.

The UK's February manufacturing PMI ticked up to 49.3 from the preliminary estimate of 49.2 and 47.0 in January. While still in contraction territory, it is the best reading since last July. The UK also reported stronger than expected consumer credit and mortgage approvals than expected. Although recession expectations are widespread, many are beginning to question it and at least one large bank now says a recession has been averted.

After a poor close yesterday (on its lows near $1.0575), the euro has popped back and is trading at a five-day high in Europe near $1.0660. Some buying may be related to the 1.5 bln euro options expiring today at $1.06. Initial resistance around $1.0685 may cap upticks given overbought momentum indicators. That said, a close above it would lift the technical tone. Large options at $1.06 and $1.07 expire Friday. Sterling also was turned back yesterday and settled on its lows (~$1.2020), but unlike the euro, has found little new demand. It bounced to almost $1.2090 and held below yesterday's high (~$1.2145). It risen above the 20-day moving average but failed to close above it. It is found today slightly above $1.2060. There are options for nearly GBP500 mln at $1.20 that expire today.

America

Yesterday's battery of US data is unlikely change economic views. The December house prices are too dated for most, and the January trade deficit was only a little bigger than expect, and the weaker wholesale inventories were partly blunted by the stronger retail inventories and other better-than-expected January reports. The data for February, which included the Chicago PMI, the Conference Board's consumer confidence, and the Richmond Fed's manufacturing survey, were all weaker than expected. The Richmond Fed's business condition measure and the Dallas Fed's service activity report were still in contraction territory, even if a little less so than January. Today's highlights are the final manufacturing PMI and the ISM manufacturing survey. Both are expected to remain below 50 as they have since last October. A warm January bodes well for construction spending, which is seen rising by 0.2% after a 0.4% decline in December. Lastly, auto sales will trickle in through the day, perhaps preventing them from having the impact commensurate with their significance. Auto sales have typically slow in February (last eight consecutive years) and the median forecast in Bloomberg's survey sees auto sales slowing to a 14.7 mln seasonally adjusted annual pace, from 15.74 in January, which were the highest since May 2021. 

Canada sees the February manufacturing PMI. It is not typically a market-mover. That said, it fell for the last five months of 2022 before rising back above 50 in January for the first time since last July. The US dollar closed firmly yesterday, but remained within the range set on Monday, which was within Friday's range. Last's Friday's high, which was the greenback's best level since early January, was near CAD1.3665 and the January high was closer to CAD1.3685. The US dollar has come back offered today, with the risk-on sentiment. However, it is holding above yesterday's low (~CAD1.3560), and this has to be taken out to be meaningful. Note that there are options for $500 mln at CAD1.3580 that expire today. 

Mexico's economic calendar is more complicated. Sure, February's manufacturing PMI and IMEF surveys will be reported. But two other reports may be more important. First, Mexico reports January worker remittances. There is a clear seasonal pattern for strength in December and weakness in January. Worker remittances have emerged as a key source of capital inflows into Mexico and have been stable to higher, and sufficient to cover the trade deficit. The proper comparison for the January figure (expected ~$4.5 bln) is not December (~$5.4 bln) but January 2022 ($3.9 bln) and January 2021 (~$3.5 bln). The dollar posted a fresh five-year low against the peso yesterday near MXN18.2820. The losses were extended today to almost MXN18.24 before the greenback recovered in the European morning to almost MXN18.30. A nearby cap is seen in the MXN18.33-MXN18.35 area. A push above MXN18.40 would likely trigger stops.