Favorable News Out Of China To Boost Markets

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Favorable news out of China is helping the major indexes start the new quarter on a positive note at the open, but how stocks close today's session will depend a lot on how the U.S. factory sector ISM survey comes out, a little later.

China's factory sector is still under pressure, but today's release offers some tell-tale signs of improvement. The country's official manufacturing PMI survey for September came in a tad better than expected at 49.8 vs estimates of 49.7, which is also where the index stood in the August read.

While the 49.8 reading is below the line that separates expansion from contraction, the index's sub-components dealing with production, new orders, exports and consumption all showed improvement. The ever-so-slight improvement in the official PMI survey runs counter to what we saw recently from the competing private-sector survey from Caixin Media and Markit whose preliminary September reading fell to a six-year low of 47.

One possible explanation for the divergence between these two measures is that the official survey has a bigger representation of large state sector manufacturers while the Caixin survey is more geared towards smaller private-sector enterprises. The improvement nevertheless confirms the optimistic narrative about China which pins the loss of momentum in the factory sector over the summer months on temporary official clean-air mandates ahead of the World War parade. Going by that view, the backdrop is still difficult, but the summer weakness is steadily dissipating.

China optimists also cite the continued momentum in the country's service sector, whose share in the overall economy has been increasing in recent years. The service sector accounted for roughly half of the country's total output in the first half of the year, up from roughly 39% in 2010. The service sector PMI survey which came out alongside the manufacturing PMI survey today unchanged for September from the month before at 53.4. The private-sector Caixin September PMI survey for services showed a drop from the month before, but nevertheless remained above the 50 level.

What this shows is a two-track trajectory for the Chinese economy, with the factory sector losing ground while services are still thriving. This would be consistent with what we are hearing from some of the major U.S. companies as well, with operators like Apple ( AAPL ) and Starbucks ( SBUX ) doing fine while Caterpillar ( CAT ) and other industrial players are losing ground.

Today's report doesn't mean that the market's recent China worries are now behind, but it is nevertheless a reassuring start. If confirmed by more data in the coming days, it will lessen the odds of a hard-landing in that country, which is a net positive for the global economy and stocks. Even the Fed, which delayed its lift-off decision last month because of China-related uncertainty, will feel confident enough in finally moving in that direction.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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