PMIs Reinforce Outperformance Theme

We noted late last week that China's PMI prints may reinforce the China outperformance theme (see this link for more details). Today's non-manufacturing PMI printed much stronger than expected, coming in at 54.7 versus 50.5 expected and is back to close to highs from May of last year. The manufacturing PMI missed estimates (50.2 versus 50.5 expected), although it still managed to move back into expansionary territory.

• The surprising aspect of today's result is the extent of the non-manufacturing PMI bounce, particularly given on-going covid related restrictions observed during June.
• In any case, today's outcomes should be enough to push the Citi China Economic Activity Surprise Index (EASI) higher. The chart below plots the China EASI versus the US EASI, which have crossed over recently.

Fig 1: Citi China & US EASI Trends - Crossing Over

Source: Citi, MNI - Market News/Bloomberg

• Such a backdrop may reinforce the China outperformance theme that has been evident in FX and equities. The second chart below plots the ratio of China to world equities against the CNY NEER.
• Correlations between these two series swing about, but sharp periods of China equity outperformance have coincided with rising NEER levels.
• A good analogy with the current episode is late Q1 2020. China was emerging from its first Covid wave just at the rest of the world was going into its first. China is currently emerging from its second wave, while economic conditions in the US/EU are more uncertain as tighter financial conditions bite.
• There are of course caveats, a lot will depend on how Covid cases evolve given China's dynamic Covid zero strategy. Note we get more updates on China's economic momentum tomorrow, with the Caixin manufacturing PMI due, while the Caixin services PMI prints early next week.

Fig 2: Chine To World Equity Ratio Versus J.P. Morgan CNY NEER

Source: J.P Morgan, MNI - Market News/MNI