- Important Chinese PMI surveys on Tuesday, ahead of the Fed meeting
- Improvement across the board could be on the cards after positive GDP print
- Aussie could benefit against the US dollar
- Data to be released on Tuesday at 01.30 and 01.45 GMT respectively
A Fed-dominated week
The market’s focus next week will be firmly on Wednesday’s Fed meeting. Its outcome and the overall rhetoric could dictate market sentiment for the next month.
On Tuesday, the April Chinese PMI surveys will be released. The market reacted positively to the recent upside GDP surprise for the first quarter of 2024. However, the positive headline figure masked the mixed underlying details. The pickup in growth was almost entirely driven by a decent increase in industrial production.
There is continued weakness in the consumer side of the economy. This is the key difference between most economies and the US where consumers, despite the surge in lending and credit card rates, continue to vigorously spend. Retail sales in China remain very weak, a situation mostly attributed to the ailing housing sector.
Government measures have not had significant impact yet
Despite several measures put in place to support this sector, house prices remain under pressure. The March 2024 figure showed an annual drop of 2.2% – the highest one since August 2015. As a result, new home sales are going down the drain as both the expectations for lower future house prices and shrinking disposable incomes are forcing buyers to sit on the sidelines for now.
As a result, there are increasing calls for more action from the PBoC. In February, it managed to surprise the market with its largest ever cut to the 5-year Loan Prime Rate (LPR). This is the benchmark rate for mortgages in China and it could be the only way out from the current housing crisis. However, there is a big obstacle: China’s unwillingness to weaken the yuan.
However, this obstacle could be removed if central banks across the globe start to ease their monetary policy stance. Barring a surprise, the ECB will most likely announce a rate cut in June with market participants anxiously waiting for a similar signal from the Fed, despite the stickiness seen in inflation since the start of 2024.
Manufacturing PMIs could maintain the current positive momentum
Moving back to the Chinese PMIs and both the national and private manufacturing surveys will be published on Tuesday. The former tends to focus on the large state-owned firms, while the latter tends to cover more private and export-oriented corporates. Both are hovering around the 50 threshold, but some positive momentum appears to be building up lately.
The vibe is different in the national PMI services survey. Following a trough in late 2023, there is an upwards trend in place with the March 2024 print being the strongest once since June 2023.
Another encouraging set of figures on Tuesday is unlikely to change the overall sentiment about China’s growth outlook but it would definitely allow the market to feel more confident. A few big investment houses have already upgraded their 2024 growth forecasts and more revisions could be on the way if data remains positive during May.
Aussie could get another boost on Tuesday
Following the recent stronger Australian inflation report for the first quarter of 2024, the market is pricing in a small probability of a rate hike during 2024. This looks like an exaggerated reaction but a plethora of positive Chinese data prints, and possibly another PBoC rate cut down the line, could really create the conditions of a growth acceleration in the Southern Hemisphere.
The aussie/dollar pair has recorded six consecutive green sessions, quickly climbing to the 0.6520 area. If Tuesday’s data proves positive, the 100-day simple moving average (SMA) at 0.6581 is next in line to be tested. On the other hand, weak Chinese data could cast a shadow on the current aussie strength and hence could cause a small correction towards the 0.6458 level.
