Chinese PMI data for October surprised strongly on the upside (see chart below), adding to the picture of a global recovery and putting more fuel on the reflation theme . China consumes around 50% of global industrial metals and the Chinese strength explains why iron ore prices and other metal prices keep rising.
The data are positive for risk assets , as they underpin the picture of a global cyclical rebound. For bond markets, the data are negative , as they strengthen the reflation case (see also Strategy: Higher inflation to push up inflation expectations , 28 October).
PMIs for the manufacturing sector were the strongest in two years and point to a strengthening of the Chinese recovery into Q4. Our expectation was that growth would stabilise at the Q3 level in Q4 and then gradually moderate in 2017 (see Research: China letter 3 - growth outlook and reliance on old engines , 27 October).
We still look for a moderation in 2017 but the data today suggest the peak will be later and from a higher level . It is difficult to time a cyclical peak and the PMIs suggest that the Chinese recovery is continuing into year-end and that growth is likely to stay strong at the beginning of 2017.
Why do we still look for moderation in 2017? The reason is that the current recovery is driven by (a) an infrastructure boost this year and (b) a recovery in residential construction due to high home sales in 2015 and 2016. However, leading indicators suggest growth in these two areas is likely to fade in 2017. China has started to tighten in tier-1 and some tier-2 cities to dampen speculative pressures. This has already led to some decline in home sales. At the same time, data for infrastructure projects suggest these will level off soon (see charts at the bottom of the next page).
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