China Caixin manufacturing PMI, which is more export-oriented, rose to 51.2 in June from 50.7 in May, the most robust improvement rate recorded since December 2019, which is signaling that the manufacturing sector continued to recover in a post-epidemic period,
The key is that the upturn was supported by further relaxation of export and import controls, which enabled more firms to resume the regular order of business. Indeed business confidence rose to a 4-month high, while firms expanded their purchasing activity at a quicker rate.
But the new export orders continued to be a sore point suggesting external demand remains weak. This may be due to anti-China sentiment or nothing more sinister than consumer uncertainty around the pandemic overseas; we will soon find out.
Still, we will likely need several months of improving data to bridge the consumer's dichotomy between current buoyant conditions and subdued future expectations. But one needs to ask if portfolios are ready for a 55 or 60 PMI print in the coming months?
Still, China's string of data beats supports the notion that global economic recovery is well underway.
Gold Market
For the last week or so there the discussion on how to hedge against inflation has been nonstop. No one expects a massive breakout, but everyone realizes portfolios are well under positioned for even a modest uptick in inflation.
There is a definite push back against using TIPS, which trade with negative yield – in other words, traders do not want to pay for inflation protection.
So, this is where gold shines even if the US dollar does not cooperate, gold remains the best non-USD hedge.
The consensus has been that the dollar will decline, as inflation (the right kind) would represent recovery and lead to the global rotation trade. I remain reticent to the view, and when we return to all systems go, or at least as close to all orders go as systematically, possibly the US markets will only game in town. US exceptionalism will reign supreme, and the dollar will remain supported by inflation.
Oil Markets
Good news for risk markets is that oil prices are stabilizing higher after the API survey, but on a more somber tone, not much can be gleaned from overnight price action as the two most active sessions for the global oil markets were a tale of two trends.
Oil prices at the New York open surged as a tailwind from OPEC extraordinary compliance and improving cyclical data shot prices higher only to get knocked lower between most actively trading hours due to COVID19 headwinds.
But in the meantime, expect the bid to be bought on the improving inventory backdrop and of the API survey is confirmed by the EIA prices higher is one of the two bullish market conditions that have been met, which is the inventory draw. The other is a drop-in virus case counts in at least one of the most populous US states, although it's unpredictable to forecast over the near term.