Monday, November 1, 2010

Chinese Manufacturing Advances to Best Levels in Half a Year

China's purchasing managers' index has come to represent one of the more closely watched gauges in trying to determine what is going on in the world's second largest economy.  As it is announced overnight before the first day of trading each month in the West, it has served as a positive catalyst to jump start futures many a month (or at least the convenient excuse).  While this figure flirted with a breakeven reading of 50 a few months back, it looks to now be back solidly in expansion mode - something probably telegraphed by the price of copper the past 2 months, although with the cross currents of QE speculation, it is difficult to tell what is due to China and what is due to front running printing presses.

Either way, the Chinese stock market, after being a massive laggard much of the year had the best October of any major global market as the Chinese came back from holiday in a buying mood (plus needed to catch up to the rest of the world's indexes).  This continued overnight with another 2.5% spike (not represented in the chart below)

Please note there are actually 2 purchashing managers' indexes - one private, and one government; the fact there is a private survey is the only reason I give this data some credence, as much of the Chinese data I'd consider "fog of war".  (Believing an economy can grow 9-12% year after year, with little inflation takes a serious amount of Kool Aid consumption)   Much like we saw in the Chicago PMI figures Friday, "prices paid" are shooting up quickly. [Prices Paid in Chicago PMI Escalate at "Unimaginable Rate and Pace"]  Readings over 50 are expansionary.

As money managers, in an environment characterized by bubbles and busts the past 15 years, it has become very important to now figure out where the Federal Reserve will create the next bubble to try to make money (and then try to escape the market, before it all caves in).  I proposed a while back the obvious choices would be emerging markets and commodities.... and this indeed appears to be where the capital flows are going.  Many developing economies are desperately trying to keep this flood of liquidity out by imposing various capital controls... to which Bernanke says... "oh yea? I got more where that came from."   So we all know the game here - keep investing in the hottest parts of the market as they rally... and rally... and rally... then go parabolic.  Then crash.  You already know the playbook if you've been around the past 15 years - the game is the same, only the bubble created by Alan G or Ben B changes.

Via Bloomberg
  • China’s manufacturing expanded at the fastest pace in six months in October, indicating the economy can bear more gains in the yuan and interest-rate increases to cool price pressures.
  • A purchasing managers’ index released by the logistics federation rose to 54.7 from 53.8 in September, with input prices climbing the most in six months. A second PMI, from HSBC Holdings Plc and Markit Economics, jumped to 54.8 from 52.9.
  • “Economic activities remained strong, while inflation pressures continued to mount,” said Liu Li-Gang, a Hong Kong- based economist at Australia & New Zealand Banking Group Ltd. “Inflation is far from peaking, which could invite another interest-rate hike by December.”
  • An index of input prices rose to 69.9 in October from 65.3 in September, the biggest gain of 11 sub-indexes. 
  • Manufacturers’ new orders are near boom levels boosted by domestic spending, including the construction of welfare homes and accelerated work on stimulus projects, the logistics federation said.  (apparently the Tea Party has not yet made inroads in Shanghai
  • In contrast, a measure of new export orders slipped to 52.6 from 52.8.
  • Inflows of money from abroad are complicating management of the economy after a record expansion in credit in 2009 that added to asset-bubble risks.....  property prices have made record gains this year.
  • The government-backed PMI, released by the Beijing-based China Federation of Logistics and Purchasing and the National Bureau of Statistics, covers more than 820 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics. The HSBC survey covers more than 400 manufacturing firms.

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