Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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China Update: Manufacturing new orders expand, services growth decelerates in mixed August PMI data
Redmond Wong
Chief China Strategist
Summary: China's August manufacturing PMI increased to 49.7, with the New Orders sub-index reaching 50.2, indicating the first expansion in new orders since March. Non-manufacturing PMI fell to 51.0, Services to 50.5, while Construction strengthened to 53.8. The data suggests uncertain manufacturing improvement, waning services momentum, and construction improvement but challenges ahead.
China's NBS manufacturing PMI rose to 49.7 in August from July's 49.3, surpassing the projected median forecast of 49.2. Despite this improvement, the reading still indicates contraction. Particularly noteworthy is the resurgence of the New Orders sub-index to 50.2, marking the first expansion since March. Another positive sign is the increase in the Output Prices sub-index to 52.0 from 48.6. However, New Export Orders, while showing modest improvement, remain at 46.7, firmly within contraction territory. Additionally, the Manufacturing Employment sub-index slid to 48. Despite glimpses of improvement in new orders and output prices, the prevailing conditions of China's manufacturing sector remain challenging.
Conversely, the non-manufacturing PMI decreased to 51.0 in August, down from July's 51.5, a more pronounced decline compared to the 51.2 predicted by economists surveyed by Bloomberg. The Services sub-index decreased by a full point to 50.5 in August, despite the resilience of travel-related components. On the other hand, the Construction sub-index strengthened to 53.8 in August from 51.2, driven by increased infrastructure construction resulting from an acceleration in the issuance of local government special bonds. Nevertheless, the New Construction Orders sub-index remained in contraction territory, in spite of climbing to 48.5 from 46.3. This suggests an impending slowdown in construction activity given the depressed property market.
The NBS PMI data for August indicate early traces of resurgence in the manufacturing sector, although the broader perspective remains enshrouded in uncertainty. Concurrently, the service sector demonstrates a fading momentum in contrast to preceding months, thereby ushering in specific economic vulnerabilities. The construction sector's potential also hangs in the balance due to the consistent weakness in new construction orders. Regrettably lackluster, this report is unlikely to furnish the requisite support for the Chinese equity market and industrial metal prices in the near term.
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