We’ve been writing since the beginning of the year that there are two important macro drivers to markets at the moment. These are:
The market seems to be firmly focused on the second driver, the Fed. But, for some reason, still largely ignoring the many blaring warning signs in Chinese economic data — at least for the moment. This data is telling us that Xi and company are moving along with their stated goal of deleveraging.
The market appears to be operating on the old assumption that the CCP will just inject lots of credit into the system the moment things get rough. But, as we’ve been noting the last few months, this isn’t going to be the case.
Our baseline needs to be that China will continue to actively deleverage and attempt to reorganize its economy. This will continue to have increasingly profound effects on global markets. We should expect this story to play out until the end of 2019, at the earliest. That’s when the CCP is likely to reverse course and juice its economy so it can be strong in time for the Party’s centennial anniversary in 2021.
Let’s look at the charts.
The YoY change in the Global Manufacturing PMI has turned negative for the first time since 2015, bringing global equities lower with it.
Fathom Consulting’s Chinese economic momentum indicator (blue line), which has a positive leading correlation to commodities, has turned over and is heading lower. If you were wondering why crude oil prices have collapsed recently, this is one of the reasons…
China’s economy is largely dependent on exports. Well, it’s Export Orders Index recently fell to its lowest readings since 2015.
