Be warned, China Manufacturing PMI for January may disappoint

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The JP Morgan Emerging Market Bond Yield spread to U.S. Treasuries has been a remarkable leading indicator of China’s manufacturing PMI, especially over the past 15 months. (Please note that the PMI is in reverse order on the axis.)

Sources: chineseshipping.com; I-Net Bridge; Plexus Asset Management.

Leading by one month, the yield spread indicates that the bond market in December expected China’s manufacturing PMI in January to increase to approximately 55.0 from 53.9. The current yield spread of 239 basis points suggests that the pace of the expansion of China’s manufacturing sector will be upped or maintained in February.

Sources: chineseshipping.com; I-Net Bridge; Plexus Asset Management.

But will it?

My readings of the situation in the global shipping industry suggest that the market may be too optimistic in its expectations.

The Baltic Dry Index, echoed by the Chinese Bulk Freight Index, has collapsed since mid-November, while the Shanghai Composite Containerized Index for exports continues to be extremely weak.

Sources: chineseshipping.com; I-Net Bridge; Plexus Asset Management.

The fly in the ointment remains the Europe route.

Sources: chineseshipping.com; Plexus Asset Management.

The slump in bulk freight rates as measured by the Baltic Dry Index and the Chinese Bulk Freight Index, together with a steep decline in containerized freight rate indices, is worrisome as it may indicate that inventories in the manufacturing sector may be too high given the level of orders.

Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

The divergence between the stocks of major inputs and the Baltic Dry Index is of major concern to me and could find the manufacturing PMI for January (to be published early next week) wanting.

Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

From a seasonal point of view the January manufacturing PMI will be influenced by the timing of China’s Golden Week incorporating the Chinese New Year celebrations.

Sources: Li & Fung; Plexus Asset Management.

In recent history, when the Golden Week fell at the beginning of February, the PMIs in January and February were pretty weak.

Sources: Li & Fung; Plexus Asset Management.

But only February’s PMI was affected when the Golden Week fell in the second half of February.

Sources: Li & Fung; Plexus Asset Management.

With this year’s Golden Week scheduled for February 2–8 it seems to me that January’s PMI may disappoint.

Is this not what the Shanghai Composite Index is telling us?

Sources: Li & Fung; I-Net Bridge; Plexus Asset Management.

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