China Recovery – Seeing Is Believing

China Reopening

China’s faster recovery thesis got some major support from February’s activity gauges. All PMIs (Purchasing Managers Indices) improved significantly last month, with the vast majority in the expansion zone now – not only services and manufacturing, but also the new export orders and small companies PMIs (see chart below). Importantly, the construction PMI shot above 60.0, pointing to the ongoing infrastructure push but also a signal that the housing sector might be getting more “alive.” China’s equities and FX – as well as many risky assets – had a very good day today. China’s credit aggregates would be the next important dataset to watch – especially proxies for mortgage lending, which are vital for consumer confidence and the consumption-led recovery (in addition to the stronger employment PMI).

EM Growth Outlook

China’s new export orders gains (up from 46.1 to 52.4) sent a positive signal regarding the state of global demand, albeit the growth “landscape” looks more mixed on a country level. Emerging markets (EM) Asia mostly stayed in the expansion zone (including Thailand’s “upgrade”), but Central Europe continued to struggle deep in the contraction zone. We were also concerned by a sharp deterioration in two major African economies – South Africa and Nigeria – where February’s PMIs unexpectedly plunged below 50.0. LATAM’s high-frequency growth indicators have shown more signs of life lately – including today’s economic activity proxy in Chile and Brazil’s PMI – but this is an uphill struggle as high real interest rates – and political noise – continue to bite.

DM Rates And Inflation

Even though a recession is no longer the base-case scenario for most developed markets (DMs) this year, the “bumpy” activity dataflow in the U.S. – including February’s surprisingly weak consumer confidence index – raised questions about further growth upgrades. Today’s mixed ISM survey showed that these concerns might be justified. There were improvements, but one of the strongest upside surprises came in the “prices paid” category. And this helps to explain why the market continues to price in the higher peak rate in the U.S. and a 74% probability of a rate hike in June. Will China’s V-shaped comeback prove a more important global driver for EMs than higher for longer U.S. rates? We this that this is indeed the case for some EMs, especially in EM Asia. Stay tuned!

Chart at a Glance: China Recovery – V-Shape After All?

Source: Bloomberg LP.

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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