Economic Insights

Economic Insights

China flash manufacturing PMI figure rebounds in July

HSBC Flash China Manufacturing PMI stands at 49.5, up from previous 48.2 in June, and the figure is the highest in the past 5 months; its 3-month average is 48.7.

 

 

 

 

 

 

 

 

 

 

Source: Markit

The demand could increase because the Production and Backlogs of Work components have expanded and changed the direction.

Source: Markit

 

Source: Markit

The improved flash manufacturing PMI offset some negative sentiment because a negative Q3 growth outlook was forecast from one of the People’s Bank of China’s (PBOC) adviser yesterday. However, it is still not justified to say that the earlier government easing measures have stimulated the economy because the overall demand is weak, and employment continues to show contraction. There will be further economic data required to describe a clearer scenario.

Moody’s gives core Euro Zone a negative outlook

Moody’s downgraded the triple-A rated countries such as Germany, the Netherlands and Luxembourg from stable to negative. However the triple-A ratings remain. In addition, Moody’s has also affirmed Finland’s Aaa rating and stable outlook due to its unique credit profile.

The downgrade has a few rationales. In Moody’s point of view, the likelihood of “Grexit” has increased. Besides that, Spain and Italy could have a larger impact to the entire region if any catastrophic event going to happen; so the contagion risk is Moody’s concern. Even if it does not happen in the future, the high rating countries probably carry heavier burdens due to the deteriorating macros in Spain and Italy who might seek external support on their sovereigns instead of their banking sectors, and it is just a matter of time.

The size of the bond market in Spain is around 2X larger than Greece and Portugal, thus the liabilities are huge, and probably there is a need to absorb more on the balance sheet if the European Stability Mechanism (ESM) needs to increase the size or those contingent cases. At this time, Spain’s funding capacities have been narrowed, and its 10-year bond yield nearly hit 7.5% yesterday.

I believe there is a heavy portfolio in German banks that is exposed to those stressed countries such as Spain and Italy. The deteriorating assets potentially threaten the stability in the German banking system.

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