Negative China PMI weighs on global markets; Chinese rating agency goes negative on NZ cutting growth prospects

by Kymberly Martin

NZ Dollar

Good morning all, the end of the week sees us open the NZD at the 0.8280 level – the lower end of the nights trading range.

Performance on cross rates by the NZD is generally poor, though not so against the beleaguered AUD & CAD which both continue to bear the brunt of weak sentiment.

Yesterday’s newswires were a mix for NZ markets, though in the end little trading was focused on the printing of staunch PMI & Consumer Confidence updates or indeed the MPI announcement regarding the trapping of a Queensland Fruit Fly in Whangarei.

New Zealand’s manufacturing sector ended the year on a healthy note, and the first time since 2007 that every month recorded expansion in activity after yesterday’s 56.4 result for December (down from 57.0 in November).

The weaker print of HSBC’s Flash Chinese PMI impacted yesterday, weighing on particularly AUD sentiment that saw traders completely unravel all the post CPI gains and some in overnight trade.

Overnight Chinese rating agency, Dagong, downgraded the rating outlook for New Zealand from stable to negative partly due to downward pressures on its outlook for economic growth.

The agency maintained at AA+ and AA respectively ratings for the country's domestic currency and foreign currency sovereign credit. In their website statement the agency mentions New Zealand’s steady trade growth but cautions against the overheating real estate sector, fiscal balance and debt pressures as well as the expected rises in both domestic & external interest rates.

Their growth forecasts are for 2.3% and 1.6% respectively in 2014 and 2015, significantly shy of the RBNZ’s own forecasts for the same periods.

So to the day ahead and the outlook is a long weekend for many. We do have monthly credit card spending data due this afternoon however that is unlikely to trouble the scorers as they try to beat the traffic and catch a slice of summer.

We’ll close our week once again mindful of the continued rejection of rallies by both the NZD and the AUD, so we sellers of light upticks and consider the possibility of further tests of recent support levels at 0.8250 and indeed 0.8210 in the sessions ahead.

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Majors

Yesterday the “flash estimate” of HSBC’s Chinese PMI index fell to 49.6 from December’s 50.5.

This was the first time since July’s 47.7 print that the index has been below 50. Our research team have previously pointed out many times before that there is not the same correlation between China’s PMI readings and its official data on industrial production or GDP that is observed in other countries.

For every single month of 2013, for example, whether the PMI index was above or below 50, the year-on-year rate of industrial production was in a range between 8.9% and 10.4%, GDP was between 7.5% and 7.8% and retail sales were between 12.6% and 13.7%.

Despite the apparent disconnect between survey results and hard economic data, the Australian Dollar is always the most sensitive of the major currencies to Chinese PMI numbers and so it has proven to be since its mid-afternoon release yesterday.

Elsewhere amongst the majors, the EUR makes a rare 2014 appearance at the top of the one day performance chart. Much better than expected flash PMI numbers in both France and Germany were responsible for this.

In absolute terms the French figures were still awful; the 22nd consecutive month in which manufacturing PMI was below 50. But, FX is all about expectations and a ‘better than expected number’ which showed things getting worse at a slower pace (hurrah!) was sufficient to prompt some EUR short-covering, especially when taken alongside a German manufacturing PMI of 56.3; a near two year high for this series.

The US data seems to have been of negligible impact, Markits PMI offering was 53.7 vs. 55.0 expectations and Existing Home Sales also tailed forecasts while Initial Jobless Claims surprised no one printing at 326k (325k previous).

On both sides of the Atlantic equity indices have printed red ink, caught in the backwash of the Chinese data & losing circa 1% in most instances.

All its research is available here.