The week will be closing with some really interesting data. So interesting, in fact, that it’s likely to get the undivided attention of the markets for several reasons.
China is on holiday for the duration of the week, so the normal flow of market information is interrupted. So, with Chinese markets closed, the reaction to data is unconventional.
The official measure of PMI is the only bit of data that we will be getting during the Lunar New Year holiday.
Its primary effect on markets will likely be overseas, affecting the AUD, NZD, and JPY primarily.
Old news at this point?
The spread of coronavirus has thrown a wrench into the normal evaluation of data coming out of China.
The official and Caixin PMI surveys were carried out just as the virus was hitting the news. But, at the time, the scale of it was uncertain. Therefore, it’s likely that the PMIs don’t have the effect of the virus included in the results.
Despite the holidays, a lot has happened in China in the days following the completion of the PMI survey.
New travel restrictions have been put into place that are likely to impact manufacturing production. In addition, the government has announced more stimulus measures.
We also expect further cuts to the Reserve Requirements Ratio (the “triple R”) to be announced at any moment.
What We Are Looking For
The circumstances are likely to make the data even more market-moving this time around.
However, we have to understand it in the context in which it was collected: as mass media coverage of the coronavirus took off, and just before the start of the Lunar New Year.
Expectations are for manufacturing PMI to stay just barely in growth territory, expanding to 50.5 from 50.2 prior.
This would be the third consecutive month in expansion. However, it would still be somewhat lackluster given that it comes after the signing of the Phase One deal. It also shows that the manufacturing sector has little space to handle the potential effects of prolonged shutdowns to deal with the virus outbreak.
Expectations are for Services PMI to stay flat at 53.5. The domestic market in China has remained largely resilient during the trade war. Therefore, we weren’t expecting it to show much of a rebound following the trade deal.
However, with the travel restrictions being implemented in China, it’s the sector most likely to be affected by the virus. In turn, it could have an impact on New Zealand, which primarily exports consumer goods to China.
On Monday we get the release of the Caixin Manufacturing PMI. We can expect this to expand just slightly to 51.6 from 51.5 prior. It too was showing a rebound after reaching a trade deal. The broader range of smaller companies measured by Caixin had more agility to take advantage of the changing situation.
However, it also has a higher number of consumer-oriented companies. This means the virus outbreak could impact Caixin more than the NBS going forward.
It’s Still Uncertain
Many experts have said that next week will be critical to see whether authorities manage to get a handle on the virus. Companies can then make a more accurate calibration of the effects it will have on production.
From there, it will be easier to have a clearer view of how much imports from commodities exporters will be affected, and therefore the impact on their currencies.
However, the markets hate uncertainty. So, they are likely to overprice potential risks, meaning that even if there is a blow-out result in PMIs, traders might not be willing to get too enthusiastic about it.