China Caixin Manufacturing PMI Falls to 50.5 on Weak Overseas Demand

Highlights

• It was a busy start to the week on the Asian economic calendar.
• Manufacturing PMIs from China garnered interest, with the Caixin Manufacturing PMI falling from 50.9 to 50.5.
• Later today, Eurozone manufacturing PMI and US ISM Manufacturing PMI numbers will also need consideration before the Fourth of July holidays.

It was a busy start to the day on the Asian economic calendar. Manufacturing PMI and building approval numbers from Australia and Tankan survey-based numbers from Japan drew early interest.

However, manufacturing sector PMI numbers from China were the focal point. The Caixin Manufacturing PMI fell from 50.9 to 50.5 in June versus a forecasted 50.2.

According to the June survey,

• Production growth slowed from the previous month’s 11-month high.
• Total new business grew more slowly than in May, with domestic demand driving growth.
• Manufacturers cited weak global economic conditions as a drag on overseas demand.
• However, manufacturers responded to the continued upward trend in new orders by increasing input inventories.
• Despite the pickup in demand, firms remained cautious about hiring, leading to a fourth consecutive monthly decline in employment.
• Input costs fell at the fastest pace since January 2016, with improving supply chains and softer-than-expected demand a drag.
• Increased competition and lower input costs supported a decline in selling prices.
• Firms remained optimistic about the next 12 months, the level of optimism fell to an eight-month low.

While there will be relief that the manufacturing sector avoided a contraction, the survey highlighted headwinds facing the Chinese economy. Significantly, weak demand suggests the Chinese economy may continue to struggle over the near term.

AUD/USD Reaction to China Caixin Manufacturing PMI Fall

Before the China PMI numbers, the AUD/USD rose to a pre-stat high of $0.66675 before falling to a low of $0.66480.

However, in response to the PMI survey, the AUD/USD rose to a post-stat high of $0.66655 before falling to a low of $0.66497.

This morning, the AUD/USD was down 0.19% to $0.66513.

Next Up

Looking ahead to the European session, investors should also consider the manufacturing PMI numbers for Italy, Germany, and the Eurozone. A deeper contraction across the Eurozone manufacturing sector would weigh on demand expectations for raw materials and commodity currencies.

However, we expect US economic indicators to have more influence.

The ISM Manufacturing PMI will draw plenty of interest later today. Investors should consider employment, inflation, and new order sub-components.

Softer-than-expected inflation numbers on Friday failed to curtail bets on a Fed 25-basis point interest rate hike this month nor another move in September. Weak PMI numbers could impact sentiment toward a post-summer rate hike.

According to the CME FedWatch Tool, the probability of a 25-basis point July Fed rate hike stood at 86.8% versus 71.9% one week earlier. Significantly, the chances of the Fed lifting rates to 5.75% in September stood at 20.8%, up from 11.5% one week earlier.