Chinese Manufacturing Slumps, Will UK Inflation Follow Suit?

Europe is walking into a wall of worry from China this morning following yet another poor performance from the country’s manufacturing sector. The preliminary reading of manufacturing PMI within China through March hit an 11 month low overnight. While these sentiment surveys are not exact measures of economic prosperity and output, the correlation with industrial spending and investment is strong.

A poor Q1 in China

The People’s Bank of China is widely expected to increase the amount of stimulus it is pumping into the Chinese economy through Q2. As the manufacturing sector has been poor, the retail and consumer spending side of the Chinese economy has also disappointed with deflationary pressures weighing. China has a growth target of 7% growth through 2015; readings that show that the Chinese manufacturing is contracting at the fastest rate in nearly a year are not contiguous with such lofty desires. The wider reaction through the world economy, however, is likely to be seen as lower commodity prices.

What goes up, must come down.

China’s commodity greed was the driving force behind the bubble in raw materials through the 2000s. Factories now lie dormant, or are at least producing goods at well below capacity. Lower demand and a stable supply leaves prices nowhere to go but down. Oil is down around 1.2% as we open up this morning, although commodity currencies such as AUD, NZD, CAD and ZAR have not fallen as much as I would have thought overnight. After a torrid couple of weeks maybe they have finally found their bottom?

Similar manufacturing and services PMI numbers are due through the morning from the Eurozone economy with most expected to show a fair amount of strength.

UK inflation reading to show deflation?

The highlight of the week for GBP is due today at 09.30. Inflation has been falling like a knackered lift since the middle of last year as oil and food commodity prices collapsed. Throw in weak demand within the economy and a wage picture that is still poor and there is little chance for higher inflation. Today could easily be the day that the UK economy is shown to have fallen into deflationary territory.

Only two economists surveyed by Bloomberg expect that the figure today will indeed turn negative with most expecting a decline to 0.1%. While I believe that this is priced into the market, inflation measures have been volatile in recent months and a miss on either side is entirely possible.

As for a sterling reaction we must remember that at the end of the day, the Bank of England is an inflation targeting entity and with very low inflation, the emphasis is to hold off on rate rises for longer. If there is a release to send pound lower this week, I believe that it will be today’s inflation numbers.

Inflation from the United States is also due this afternoon with year on year inflation there expected at -0.1% once again.