Chinese data suggest the worst is behind us in Chinese manufacturing.
We see 60% probability of an interim deal next week. Weak US data and impeachment headwinds put pressure on Donald Trump, which increases the chances he might compromise to get a bigger deal next year.
The 70-year anniversary of the People's Republic of China (PRC) cemented China's rise economically and militarily.
Signs of a bottom in the Chinese cycle
Monday morning was unusually cheerful this week, at least on the economic front in China. PMI manufacturing once again surprised on the upside and increasingly points to a bottom in the Chinese business cycle. In particular, the private version of PMI from Caixin was strong, as it climbed to the strongest level since early 2018 when the economy was quite robust. The official version from NBS paints a less upbeat picture but it is still moving gradually away from the low point in February. It is always good to cross-check Chinese data with numbers in the region around China but here we also see an image of tentative light shining through the darkness. For example, Taiwan PMI for September moved to the highest level since September.
If we turn to another of our favourite indicators of Chinese activity, metal prices, the same picture emerges. The top chart overleaf shows that metal price inflation fits well with the picture of moderate improvement. Indicators such as electricity generation and rail freight have also seen a lift in recent months, adding weight to the story. Finally, M1 growth has moved away from the weak readings around zero to above 3% y/y.
Comment: The improvement is coming a bit earlier than we expected but it is showing up in some of the places we regard as reliable based on historical experience. As China often leads the global business cycle and the country has been the epicentre of the global slowdown, this could be the first early sign of a bottom in the manufacturing cycle in early 2020. This has historically been supportive for global equities.
If you are a company, it is important to stress that the numbers are not great. They are just not as bad as they were at the beginning of the year. However, they offer a ray of light and at least it should be comforting that a hard landing does not seem to be on the cards. However, the development depends on what happens in the trade war but we doubt Trump will dare to escalate much further from here and he could still opt for a deal at some point.
We believe the improvement in China is related to (1) the effect of stimulus giving a lift to infrastructure and consumers, (2) residential construction still being robust due to low inventories and decent demand and (3) an inventory cycle in companies that may have run its course. We look for NBS manufacturing PMI to move sideways in the short term before recovering further in 2020 as stimulus kicks in further and we do not expect a further escalation in the trade war.
