China leads the way

Today’s pan-Asia PMI releases were a mixed bag with one noticeable exception, China’s Caixin Manufacturing PMI for August again impressively outperformed. The Caixin PMI rose to 53.1 from 52.6 in July, reinforcing that China is leading the region out of the pandemic recession. The result was more pleasing as the official Manufacturing PMI yesterday stalled, even as services surged. The net result between the two releases suggests that China is firing on nearly all its cylinders.

Elsewhere, the regional PMI’s were a mixed bag and not as positive as I had expected. Thailand, Japan, South Korea all improved, although they are still in contraction territory. Taiwan continued to outperform, while Vietnam and Malaysia went backwards. It suggests that the recovery ex-China is still uneven and more than a little fragile. In itself, it will not be enough to derail local currencies and equities, as against the US dollar and a search for yield story. One bright note would be that the major economies of Asia continue to show consistent improvement.

Australia’s Q2 Currency Account climbed to a record AUD 17.7 billion this morning, with Building Permits for July sharply rebounding to 12.0% in July from -4.2% in June. The lucky country’s exports are powering ahead on China demand for commodities, while domestic activity continues to rebound after the Covid-19 lockdowns. That won’t be enough to sway the Reserve Bank of Australia this afternoon at 1230 SGT. We expect the RBA to remain unchanged with a strongly Fed-like lower for longer, whatever it takes guidance. One thing they will not mention is negative rates, where thankfully they are refusing to enter that monetary policy box canyon.

The positive data was not enough to lift Australian equities today though, with markets focused on the detention by China of a China-based Australian journalist. Markets are fretting over the deterioration of relation between China and Australia, with China launching “probes” into Australian wine, beef and barley as well. I do believe concerns are overblown though. Despite the rocky relationship, China has not touched the holy trinity it receives from Australia, thermal coal, iron and copper ore. With China’s economy clearly recovering, Australia is likely to dodge the worst of China’s kneecapping approach to international relations with countries that disagree with it. Except for Australia and the United States though, most other nations and blocs should probably continue to wear protective padding.

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