Tuesday, June 3, 2014
More positive news out of China and another weak reading out of
Europe provide the backdrop for today's trading action. Stocks are
indicated to open modestly lower today after steady gains on Monday
and ahead of the big jobs data on Friday. The soft European data
could be interpreted in the 'bad news is good news' category given
widespread expectations from this week's European Central Bank
We got more evidence of stabilization in the Chinese economy, with
a key private sector purchasing managers index for the factory
sector showing improvement and the official service sector PMI
making gains as well. This follows the weekend release of the
better-than-expected official manufacturing PMI survey.
) final manufacturing sector PMI for May came in at 49.4 vs.
April's 48.1 reading. This confirms the improvement we saw in the
official PMI for the month, which showed the index improving to
50.8 from the previous month's 50.4 level.
The gain in the HSBC reading is particularly notable even though it
went down from the level indicated by the 'flash' reading for the
month and still remains below the 50 mark. The reason is that this
survey is weighted towards small and medium-sized businesses that
are mostly in the private sector versus the mostly state-owned
large enterprises that get tracked in the official survey.
Gains in the country's service-sector PMI (55.5 for May vs. 54.8
for April) is also promising, as the ongoing weakness in the
country's property sector needs to offset elsewhere. The PMI survey
confirmed the construction and real estate services weakness, with
a separate private sector survey showing property prices across the
country falling on a month-to-month basis in May, the first time in
Retrenchment in the property sector likely still has plenty of room
to go and represents the biggest risk to the country's financial
system and economic outlook. While this week's data is no doubt
welcome, it doesn't answer all the questions.
The stabilizing Chinese outlook is in contrast to developments in
the Euro-zone region where the picture is far from satisfactory. We
saw on Monday loss of ground in the region's PMIs and today brought
news that disinflationary trends have further taken hold in May.
This adds to pressures on the European Central Bank to come out
with a commensurate policy response in this week's meeting.
The common currency has been losing ground lately relative to the
U.S. dollar lately in anticipation of such an ECB move. The ECB
will have to move beyond mere talk and deliver this time.
Director of Research
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