China Continues to Struggle on Weak PMI Readings

PMIs rise but all sectors still contract China's composite PMI rose by five points to 42.2 in May from 37.2 in April. Despite the month-to-month improvement in the index, it still refers to a decline in output in May. The five-point month-to-month rise is significant, but the index at 42.2 is still well below the breakeven value of 50 for the composite index.

Entrenched weakness China in May registers an increase in both the services index and the manufacturing index. The services index improves sharply to 41.4 from 36.2. However, it's moving up from that very week 36.2 reading in April so that even at 41.4 there's a clear-cut decline in services activity being registered. Manufacturing fares better than services; the manufacturing PMI gains by 2.1 points on the month to a diffusion reading of 48.1. That's a lot closer to the breakeven value of 50%, but it still indicates a decline in the sector.

COVID Zero...not a soft drink China continues to suffer from its COVID zero policy and having had substantial lockdowns across the economy. These policies continue and they continue not just to hold the economy down but to threaten its vitality in the future.

Shanghai has reopened after two months of having shutdowns, but it's still at risk to any further infections should they crop up.

Tariff relief? The Biden Administration is considering dropping tariffs on Chinese goods in an effort to combat inflation in the United States. The Administration, reportedly, will still be keeping restrictions on aluminum and steel imports, but it may be willing to drop tariffs on other imported items. That could benefit the U.S. inflation outlook and it could benefit China by making it more competitive in U.S. trade.

OPEC moves but does not groove OPEC-plus has met and is going to increase oil production slightly. However, there has not been a significant impact on oil prices from this move that was largely anticipated. There had earlier been some firmness in oil prices on the ending of China's lockdowns in Shanghai. It also is reported that the Biden Administration without any new deals might be willing to 'look the other way' to let Iran export oil to combat higher global oil prices. There is no hint of the Administration cutting any slack to U.S. oil companies or to the fracking industry.

Significant entrenched weakness in China Beyond the month-to-month changes in China's PMI indexes, there are still broadly declining. China's composite, manufacturing index, and services activity index, all show net the declines over both 12 months and 24 months. The readings for the sectors all are weak. Ranking China's PMI data back to May 2018 shows the manufacturing index has a 6.1 percentile standing, the services sector has a 2.1 percentile standing, and the composite has a 2.1 percentile standing. The composite ranked at 2.1 tells us that it has been weaker only 2.1% of the time since May 2018. Clearly this is a week set of readings for China.

Part of a global phenomenon Globally, PMI data have been waffling. There are lingering effects from supply chain issues stemming from COVID and there are new concerns related to trade being impeded by the Russia-Ukraine war. The war simply drags with Russia pummeling Ukraine and Ukraine pushing back; with Russia making some progress but not much and suffering substantial damage to its troops, to its leaders, and to its equipment. In the meantime, there is a growing food shortage that Russia blames on NATO even though it was Russia that instigated the invasion of Ukraine and disrupted its economy, hijacked its ships, targeted its agricultural sector, stole its agricultural output and commandeered its ports and set up a naval embargo. There is no sign of any end in sight for the war or any hint of how or when it might end.

Globally central banks are beginning to raise rates more in unison. We are still waiting for the ECB to make its first move, but that is expected shortly. Meanwhile, in Asia and across the Pacific Rim, central banks are hiking official rates to fight what is an ongoing global inflation problem.