Chinese PMI Weakness in February Not An Immediate Cause for Concern

Over the weekend, the Chinese government released the official non-manufacturing PMI which missed estimates sending risk assets across Asia lower. The weak services PMI followed the weaker than expected manufacturing PMI last week, spooking investors that the global economic recovery could be in jeopardy as China slows.

The National Bureau of Statistics in China reported that the service sector expanded slower in February than in January with the services PMI reading 54.5 in February, below January's 56.2. The weak services PMI followed the weaker than expected manufacturing PMI last week, which came in at 50.1 for February from January's 50.4 reading.

The slowdown in the Chinese economy could be worrisome... or not. Recall that the Chinese markets and pretty much the entire economy shut down for the better part of a week in February in recognition of the lunar new year holiday. Around this time each year, output slows as people are taking vacation time. Each year, it is nearly impossible to gauge the true impact of these effects so soon after they happen.

Should economic indicators in China continue to slow in March, then it would be time to fret. However, for now, it is too hard to gauge exactly what is happening in China that investors can and should focus on any of the numerous other global crises du jour.

Chinese stocks did take a tumble on the news, with the Shanghai Composite Index falling 3.65 percent and the CSI 30 Index falling a whopping 4.61 percent. Australian shares fell in sympathy overnight, with the S&P ASX 200 Index falling 1.49 percent and the Australian dollar performing weakly overnight. The Reserve Bank of Australia is expected to release its interest rate decision overnight and should comment on the Chinese growth outlook.

Also overnight, the HSBC Markit China Non-Manufacturing PMI is set to be released for February and could confirm what the official PMI said. Also, trade data and inflation numbers are due out this week from China. Slowing inflation will ease pressures on the PBOC to tighten policy and boost the economy while strong trade data will probably quell some fears of a slowdown.