China’s manufacturing sector is in tatters.
On Monday, the latest data from HSBC’s flash manufacturing PMI showed that the sector slipped to an 11-month low at 49.2, missing the expectation of 50.2. (Any reading below 50 indicates contraction.)
And that’s not great news for the US, according to Pantheon Macro’s Ian Shepherdson in a note Tuesday.
While everyone uses the Institute of Supply Management’s manufacturing data to gauge the US, Shepherdson says ‘look to China instead’:
“We have argued over the past couple of years that if you want to know what’s likely to happen to U.S. manufacturing over the next few months, you should
look at China’s PMI, rather than the domestic ISM survey, which is beset by huge seasonal adjustment problems. Even without these issues, the China PMI tends to lead the U.S. version, which is why we don’t want to see any further decline after the unexpected drop in the preliminary unofficial HSBC/Markit index reported late Monday.”
If China’s manufacturing sector is slowing, demand for US-made business goods will suffer, Shepherdson notes.
The latest data from ISM showed US manufacturing expanded in February for the 26th consecutive month, but has been falling since last October’s high peak reading of 57.9.
Shepherdson notes, however, that makers of US consumer goods will continue to see strong demand and the weather is turning in favour of stronger seasonal data.
But that’s not enough to look completely past the China link:
“Initially, markets care only about the print rather than the underlying story, but corporate earnings don’t lie and the danger here is that a sharp rally in the ISM hides an underlying deterioration in demand from China, augmenting the hit from the capex pullback in the oil sector.”
Shepherdson added that Chinese manufacturing data has been on the downtrend, within a tight 48-52 range over the past few years. And falling rail freight traffic indicates that there’s still more room to fall.
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