Stable China vs. Wobbly Eurozone - Ahead of Wall Street

More positive news out of China and another weak reading out of Europe provide the backdrop for today's trading action. Stocks are indicated to open modestly lower today after steady gains on Monday and ahead of the big jobs data on Friday. The soft European data could be interpreted in the ‘bad news is good news' category given widespread expectations from this week's European Central Bank meeting.

We got more evidence of stabilization in the Chinese economy, with a key private sector purchasing managers index for the factory sector showing improvement and the official service sector PMI making gains as well. This follows the weekend release of the better-than-expected official manufacturing PMI survey.

HSBC Bank's (HSBC) final manufacturing sector PMI for May came in at 49.4 vs. April's 48.1 reading. This confirms the improvement we saw in the official PMI for the month, which showed the index improving to 50.8 from the previous month's 50.4 level.

The gain in the HSBC reading is particularly notable even though it went down from the level indicated by the ‘flash' reading for the month and still remains below the 50 mark. The reason is that this survey is weighted towards small and medium-sized businesses that are mostly in the private sector versus the mostly state-owned large enterprises that get tracked in the official survey.

Gains in the country's service-sector PMI (55.5 for May vs. 54.8 for April) is also promising, as the ongoing weakness in the country's property sector needs to offset elsewhere. The PMI survey confirmed the construction and real estate services weakness, with a separate private sector survey showing property prices across the country falling on a month-to-month basis in May, the first time in two years.

Retrenchment in the property sector likely still has plenty of room to go and represents the biggest risk to the country's financial system and economic outlook. While this week's data is no doubt welcome, it doesn't answer all the questions.

The stabilizing Chinese outlook is in contrast to developments in the Euro-zone region where the picture is far from satisfactory. We saw on Monday loss of ground in the region's PMIs and today brought news that disinflationary trends have further taken hold in May. This adds to pressures on the European Central Bank to come out with a commensurate policy response in this week's meeting.

The common currency has been losing ground lately relative to the U.S. dollar lately in anticipation of such an ECB move. The ECB will have to move beyond mere talk and deliver this time.

Sheraz Mian
Director of Research
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