US futures are trading lower this morning as traders are angst about the never ending growth slowdown saga in China. Any headline which is printing weak economic reading has only two questions attached to it. Firstly, if the People bank of China will do more to stop this anaemic growth? Finally if that will work at all and if when yes when will we see the results of this.
If you were thinking that the People Bank of China is done with their quantitative easing program- at least for this year – then surely think again or perhaps look at the most recent data out of China, which wasn’t very pleasing at all. The Chinese factories posted contraction during the month of October. This was a third consecutive month of contraction for the chinese manufacturing sector. So this begs the question, how much stain this will have on the fourth quarter’s GDP data, which some in the market are expecting that the number may not only bounce back to 7%, but also has the ability to surpass that number. I certainly question this after looking at this number.
Unsold inventory is the biggest angst amid Chinese factory owners who are not thinking twice to slash their cost by laying off more employees. The inventory build up in these factories is the direct result of the softer demand within the country and from abroad. The PBOC has already announced measures last month by cutting their interest rate and their RRR ratio and perhaps there may not be any surprise if we do see another similar headline before the end of this year. Despite the easing measures taken by the PBOC, the small business are still starving for credit as the banks are wary of lending funds.
The Fed have really changed their tone when it comes to raising the rate. They were dovish in September and this made the investors to think that the rate hike may not be taking placing this year at all. So in order to anchor those expectations, they just sent a hawkish statement in October, but with China printing disheartening economic reading, this could brew up the same tornado which we had a few months ago.
What will really matter when it comes to market expectations and the fed making their decision for a rate hike, will depend on the economic data which will be released this week. We will kick off with the ISM manufacturing PMI reading which is due later this afternoon. The forecast is obviously for a slight soft number with the reading of 50. But, if the actual number is even weaker than this, the market could go on the edge as investors will not be comfortable with Fed sending hawkish signals when the economic data is soft and on top of that we also have the Chinese growth problem.