It’s Risk On as China Manufacturing PMI Pulls Out of Contraction

Stronger-than-expected economic data from China is helping to drive riskier assets higher on Monday. The news also dampened concerns over the slowing global economy pushing up U.S. Treasury yields. At the same time, a Bank of Japan business confidence survey signaled weakening economic conditions in Japan. The early strength in the stock market could set the tone for the day as investors await of slew of economic data from the United States.

Finally, Good News from China

Over the weekend, China reported its services industry saw faster growth in March than estimated, while manufacturing activity also recovered.

The official non-manufacturing purchasing managers’ index (PMI), which covers the services and construction sectors, rose 0.5 points from February to 54.8, to remain well above the 50-point mark that separates growth from contraction.

This is important because the services sector accounts for more than half of China’s economy and has helped soften the impact of a manufacturing downturn. Growth slowed late last year, but never contracted, however, amid a cooling property market and faltering consumer demand for everything from cars to mobile phones.

The major event that has global investors excited is the news that China’s official manufacturing PMI picked up in March after posting three months of declines. The report showed a rise of 1.3 points to 50.5, pulling the survey out of a contraction. Furthermore, the monthly gain was the greatest since February 2012 and came after Beijing announced it would introduce tax cuts to help struggling manufacturers.

Additionally, the composite PMI, which covers both manufacturing and services, rose to 54 points in March, from 52.4 a month earlier.

The good news from China continued on Monday with a private survey showing manufacturing activity in China expanding unexpectedly in March after shrinking for three straight months.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 50.8 for March. Traders were looking for a reading of 49.9 for a second month.

Japan’s Business Confidence Weakens

In Japan, the closely watched “tankan” survey by the Bank of Japan showed worsening business confidence among the country’s big manufacturers in the first quarter.

The headline index for big manufacturers’ sentiment stood at plus 12 in March, versus plus 19 registered three months ago, the quarterly tankan survey showed. Traders were looking for a reading of 14. New estimates show traders expected the index to fall to plus 8 over the next three months.

“The large manufacturing weakness is probably worrying for (the Bank of Japan)… in the sense that the economy isn’t picking up as quickly as perhaps as had been anticipated but the bigger issue…is not the economy,” Mitul Kotecha, senior emerging markets strategist at TD Securities, told CNBC’s “Squawk Box” on Monday.

Low inflation remains the major issue for the BOJ. “Inflation keeps moving away from that target, or at least not…near the target and I think this is the biggest issue for the Bank of Japan,” Kotecha said. “They can’t change policy until that happens.”