I still cannot fathom the infatuation with all these PMI’s. An extremely minor adjustment in a PMI can send risk markets soaring with enthusiasm, so much so that any recent angst about actual data fades into obscurity. Of course, that says a lot more about the state of such “markets” than it does the quality of the data, but these cases are growing particularly egregious as “risk” looks to find any rationalization to cling to no matter how ill-suited.

China’s seesaw PMI’s are a perfect example of this. You only need to go back to June to get a sense of how badly these sentiment surveys fit with economic statistics (with far more plausibility and potential validity) of broader worth. On June 29, Reuters stated the following as if it were “fact”:

China’s vast factory sector probably registered its best performance this year in June as growth quickened to a six-month high, further signaling that its economy is regaining strength after an unsteady start to 2014.

Growth did no such thing, as all that occurred was China’s PMI was only forecast to rise to 51 from 50.8. What happened from there was actually the opposite of that all-too-usual interpretation now colored as thinly-veiled cheerleading; as we know from the atrocious industrial production figures for both July and August (with August the lowest growth since December 2008). In other words, the China PMI told us next to nothing about what was about to happen, and it didn’t really mean what everyone thought and proclaimed it did. That, however, did not stop “markets” from taking them as economic gospel and running forth with hazard.

In many ways, however, simply accepting the divergence between June’s overdependence on sentiment and the crashing reality of August actually understates the worries about how bad the industrial sector in China is doing currently. I noted last week that end demand in foreign export markets are all moving in the same (“wrong”) direction, and contrary to what China’s official figures say, an observation which should have far more impact on “markets” than some sentiment index. However, China’s problems run far deeper than even the vast export capacity, as the home building activity in the nation’s interior is rumored to be in serious jeopardy.

Along with the industrial production figures for August, electrical output fell a rather concerning 2.2% – an actual data figure that is effected by both manufacturing for export and internally for construction.

“The IP number is a surprise because Premier Li talked in Tianjin about a quite stable situation,” said Mizuho economist Shen Jianguang. “I think, very soon, they’re reaching a moment of truth. If they don’t ease, the economic deceleration will come much faster.”

Such was the serious state of August’s “unexpected” weakness; enough to actually get the attention of more than a few credentialed orthodox economists. And, as we know with the PBOC’s sudden earmark on the SLF, the central bank reacted swiftly to the economic figures in what was likely a direct shot at any jitters over a potential slowdown.

But that was all last week. This week, apparently, there is very little to worry about because once again China’s PMI is moving up. All is forgiven, economically speaking, and the “markets” can go back to not worrying about anything much other than how high this new “permanent plateau of prosperity” actually reaches. Nothing so clarifies that as a third-rate economic indicator that is both often contrarian and contains very little actual interpretive value.

A Chinese manufacturing gauge unexpectedly increased this month, suggesting export demand is helping the economy withstand a property slump…

“We thought the weakness would continue, but there is a slight pickup, so this is definitely positive for the market,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong…

“I’m optimistic on the Chinese economy, despite the correction underway in the residential sector,” said Jim Chronis, chief economist at Ausbil Investment Management Ltd. in Sydney, one of three analysts with a 50.5 estimate. Fiscal stimulus, targeted monetary easing and export demand will help sustain growth, Chronis said in an e-mail.

All that for sentiment gauge that, despite almost fully missing the slowdown that these economists are talking themselves out of, rose from 50.2 to 50.5. The air is especially thin up at these levels, though the appeal of “global growth” remains despite it.

 

Click here to sign up for our free weekly e-newsletter.

“WEALTH PRESERVATION AND ACCUMULATION THROUGH THOUGHTFUL INVESTING.”

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: jhudak@4kb.d43.myftpupload.com or 561-686-6844 . You can also book an appointment for a free, no-obligation consultation using our contact form.