Here is the Reason not to Trust Current Production PMIs

Trading Tips

Asian PMIs in manufacturing sector collapsed in tandem in March, and only China manufacturing sector looked out of place with a sharp rebound:

Mainstream media attributed mini downturn in Asian and European stocks today with disappointment related to Asian production activity negative surprise. This is a good attempt though, but I think that the situation with production in Asia was already clear – in addition to falling foreign demand for Western-oriented Asian economies, production activity was also suppressed by harsh, but seemingly effective lockdowns. In other words, by the time of the PMI release, this information should have been already contained in valuations.

It is much more interesting to analyze now another assumption – will the Asian economies repeat the V-shaped rebound of the Chinese PMI and can it trigger a wave of confidence and optimism regarded to replication of PMI rebound in other Asian economies? To answer this question, we need to study the nature and meaning of “V” in the Chinese data.

Firstly, the fact that China manufacturing PMI cratered while PMIs of the other Asian economies remained stable should be clearly related to the time earlier lockdowns in China. This is the cause of the lag between China and the other economies PMI downturns that we observe.

Secondly, production activity indices pertain to comparative statistics. They do not characterize the absolute level of activity; therefore, V-shaped patterns do not imply full or even near to full recovery. Let me explain why. When China production PMI fell to 40 points in February, and then bounced to 52, this means that companies expect the situation to be slightly better than the one in February. Which is basically consistent with the fact that the outlook during lockdowns is worse than when lockdowns are lifted but it doesn’t mean a V-shaped rebound of activity to the level, preceding a lockdown. Therefore, caution should be exercised in the interpretation of PMI data, including a possible picture of PMI recoveries in other Asian economies, which may arise later.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Share this post:

Let’s block ads! (Why?)

Tickmill

Leave a Reply

Your email address will not be published. Required fields are marked *