Official PMIs Surprise to the Upside, Trade Talks Begin/Fed Cheered
Great to back in tropical NYC after surviving the Chicago cold.
- Manufacturing PMI 49.5 versus estimate 49.3 and Dec’s 49.4
- Non-Manufacturing PMI 54.7 versus estimate 53.8 and Dec’s 53.8
Takeaway: The “official” PMIs are complied through surveys of 3,000 manufacturing and 4,000 non-manufacturing companies by the National Bureau of Statistics. While some foreigners are dismissive of the official PMIs, their sample size is much larger than Caixin/Markit PMIs. In China the official PMIs are considered trust worthy. Manufacturing not surprisingly declined in January as the PMIs are a diffusion index with readings below 50 a decline. Exporters compressed 12 months of activity into the first 6 to 9 months of 2018 in order to front run tariffs. We are seeing the fall off from that activity. While the slight uptick shows that pace of deceleration may be slowing, there is clearly a fairly broad slowdown in manufacturing. At the same time Non-Manufacturing increased as new orders and prices increased. Several years ago we wrote a piece titled A Tale of Two Chinas highlighting that we can’t treat China as a one dimensional economy. As investors we want to orient ourselves to the strongest part of China’s economy. Last night’s release reaffirms that view.
Hang Seng ended the month on a good note gaining +1.08%/299 index points on strong volumes that exceeded the 1 year daily average for the first time since December 3rd with 38 advancers and 12 decliners. Investors cheered the start of US China trade talks in DC, Fed’s hold on US interest rates, and the PMIs. The index’s leading gainers were AIA gained +2.4%/62 index points followed by Ping An +2.64%/34 index points and China Construction Bank +2.64%/23 index points. Within the MSCI China All Shares Index’s HK stocks, Healthcare jumped +3.87% on no news though one broker noted that investor sentiment has improved. Materials had a strong day +2.87% followed by discretionary +2.12% as every sector ended the day in the positive though communications was the laggard +0.34% as telecom names lagged. Southbound Connect was closed and remain so for the next week due to Chinese New Year’s.
Shanghai & Shenzhen gained +0.35% and -0.7% on light volumes and poor breadth. Why the divergence? According to a local broker 197 predominantly small cap companies pre-announced negative earnings prior to Chinese New Year’s. This is evident in Shanghai (mega/large caps) outperformance versus the Shenzhen (mid/small caps). We also see this in yesterday’s sector dispersion in the MSCI China All Shares’ mainland stocks. Blue chips stocks led the market higher as big banks led financials gained +2.07% while staples +1.53% led by liquor names and communications +1.24%. Northbound Connect volumes were very strong with buyers outpacing sellers 2 to 1. MSCI Inclusion heavyweights Kweichow Moutai saw 4 to 1 buyers to sellers, Ping An 8 to 1 and China Merchants Bank 5 to 1. Wow! Very noteworthy flows.
Mainland media sources cheered Alibaba’s results with noting the company’s revenues exceeded RMB $100b for the first time.
Fairly quiet as on the news front pre-Chinese New Year’s.
- Yield on 1 Day Chinese Gov’t Bond 1.8%
- Yield on 10 Year Chinese Gov’t Bond 3.10%
- Yield on 10 Year China Development Bank Bond 3.72%
Commodities were up on both the Dalian and Shanghai.