From Westpac’s Phat Dragon:
In the previous reading the two surveys were in reasonable accord for the first time in a while, with the headline and the new orders series both in close proximity. August saw a consistent directional move from that common starting point, but consistent with the historical characteristics of the two surveys, the decline in the HSBC measure was greater – or alternatively, the NBS was more resilient. Scaling the two headline outcomes by their respective long run averages, we have the NBS at –3.7% and HSBC at –2.4%.
The inventory story, which is so often unhelpfully inconsistent in the two PMIs, agreed on the basics a month ago, but they are diverging again. While both indicators are still sub-50 in August, HSBC fell while the NBS rose. Scaling the inventory outcomes by the long run average of the respective series, we have the NBS at +1.8%, from +1.0% in July, and the HSBC at +0.9% from +1.2% in July.
The story emanating from the PMIs appeared to be very simple in June and July – the negative phase of the short run inventory cycle was over, and the expansive phase had begun. And then the official data round for July (as well as the consumer and services surveys) seriously questioned the veracity of the twin PMI signal. This latest update essentially brings the PMIs back to where the economy is actually tracking.
Following the July surveys we wrote that “The growth rate of end-demand is underwhelming relative to historical trends of course, even if exports are firmer than they have been in some time, so we are not assuming a linear ascent all the way into Q4. Further, there is a ceiling on the height to which these indices can plausibly rise given that backdrop.” That remains true. The economy is healthier than it was in early 2014, when HSBC was more than 6% below average, but the recovery is tepid and patchy, with housing weakness a weighty anchor on both activity and confidence. The authorities would be wise to stay the course with easier policy settings, especially on the fiscal side.
Correct. The risks are all to the downside now as Chinese property shakes out.