The data from China last night
Showed PMI looking alright
But what does this mean?
Has China now seen
The end of this terrible blight?

Many pundits were both shocked and amazed when China’s PMI data was released last night and printed back above 50 (Manufacturing 52.0 and Composite 53.0), given the ongoing global economic shutdown. But if you simply consider the question asked to create the statistic; are things worse, the same or better than last month, it seems pretty plausible that things were at least the same as the previous month when commerce on the mainland shut down. And arguably, given the word that some proportion of the Chinese economy is starting to get back to work, the idea that a small proportion of respondents indicated improvement is hardly shocking. Instead, what I think we need to do is reconsider exactly what the PMI data describes.

Historically, when the global economy was functioning on, what we used to consider, a normal basis, the difference of a few tenths of a percent were seen as important. They seemed to tell a story of marginal improvement or decline on an early basis. Perhaps this was a false precision, but it was clearly the accepted narrative. The PMI data remains a key input into many econometric models, and those tenths were enough to alter forecasts. But that was then. As we all are abundantly aware, today’s economy and working conditions are dramatically different than they were, even in January. And so, the key question is; does the data we used to focus on still tell us the same story it did? Forward looking survey data is going to be far more volatile than in the past given the extraordinary actions taken by governments around the world. Quarantine, shelter-in-place and working from home will require a different set of measurements than the pre-Covid commuting world with which most of us are familiar.

Certainly, measurements of employment and consumption will remain key, but things like ISM, Fed surveys and productivity measurements are going to be far more suspect in the information they provide. After all, when the lockdowns end, and the surveys shoot higher, while the relative gains will be large, we are still likely to be in a much slower and different economic situation than we were back in January. A major investment bank is now forecasting Q2 GDP to decline by 34% annually, while Q3 is forecast to rebound 19%. The total story is one of overall decline, but the Q3 story will certainly be played up for all it is worth as the fastest growth in US history. My point is, be a little careful with what the current data is describing because it is not likely the same things we are used to from the past. The new narrative has yet to form, as the new economy has yet to emerge. While we can be pretty sure things will be different, we just don’t yet know exactly in which sectors and by how much. In other words, data will continue to be uncertain for a while, and its impact on markets will be confusing.

With that in mind, let’s take a look at where things stand this morning. After a very strong start to the week yesterday, at least on the equity front, things are a bit more mixed today. Asian markets saw both strength (Hang Seng + 1.8%) and weakness (Nikkei -0.9%), although arguably there were a few more winners than losers. Interestingly, despite the blowout Chinese PMI data, Shanghai only rose 0.1%. It seems the equity market there had a reasonable interpretation of the data. In Europe, meanwhile, things are generally positive, but not hugely so, with the DAX and FTSE 100 both higher by 0.8%, although the CAC has edged lower by 0.1%. at this time, US futures are pointing modestly higher and well off the earlier session highs.

Bond markets suffered yesterday on the back of the equity rally, as risk assets had some short-term appeal, but this morning the picture is more mixed. Treasury yields have fallen by 4bps, but Bund yields are little changed on the day. And in the European peripheral markets, Italian BTP’s are seeing yields edge higher by 1bp while Greek yields have softened by 4bps. I think today’s price action has much more to do with the fact it is month and quarter end, and there is a lot of rebalancing of portfolios ongoing, rather than as a signal of future economic/intervention activity.

In the FX market, though, the dollar continues to reign supreme with only NOK able to rally this morning in the G10 space as oil prices have rebounded sharply. A quick peek there shows WTI +7.5% and Brent +3.9%, although the price of oil remains near its lowest levels since 2001’s recession. But away from NOK, the dollar is quite firm with AUD under the most pressure, down 1.4% after some awful Australian confidence data. Clearly, the surprisingly positive Chinese data had little impact. But the euro has fallen 1.0% as concerns grow over Italy’s ability to repay its debt and what that will mean for the rest of the continent with respect to picking up the tab. Even the yen is under pressure today, perhaps on the news that the government is preparing a ¥60 trillion support package, something that will simply expand their already remarkable 235% debt/GDP ratio.

In the emerging markets, it should be no surprise that Russia’s ruble is top dog today, +1.3% on the oil rebound. Meanwhile, ZAR and KRW have also moved higher by 0.5% each with the rand benefitting from a massive influx of yield seekers as they auctioned a series of debt with yields ranging from 7.17% for 3-year to 11.37% for the 10-year variety. Meanwhile, in Seoul, the results of the USD swap auctions showed that liquidity there is improving, meaning there is less pressure on the currency. On the downside, CE4 currencies are under the gun as they track the euro lower, with the entire group down by between 0.8% and 1.3%. Perhaps the biggest disappointment today is MXN, which despite the big rebound in oil is essentially unchanged today after a 2% decline yesterday. The peso just cannot seem to get out of its own way, and as long as AMLO continues to be seen as ineffective, it is likely to stay that way.

There is some data due this morning, with Case Shiller Home Prices (exp 3.23%) and the Conference Board’s Consumer Confidence Index (110.0 down from 130.7), but it is not clear it will have much impact. Yesterday’s Dallas Fed Manufacturing Index was released at -70, the worst print in its 16-year history, but one that cannot be surprising given the nationwide shutdowns and problems in the oil patch. I don’t see today’s data having an impact, and instead, expect that the focus will be on the next bailout package, the implementation of this one, and month-end rebalancing. It is hard to make the case that the dollar will decline in this environment, but that remains a short-term view.

Good luck
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