China PMI Data Disappoints Again

Gold hit an intra-day low close to $1,530 yesterday, but has since staged a decent recovery above $1,550. Increasing deflation expectations are making it tough for silver to move back above $28. WSJ reports a surge in call option interest in GLD shares and Comex futures, suggesting that some gold bugs are expecting a decent rally soon.

More disappointing economic data from the UK, eurozone and China has added to the market gloom. Eurozone PMI fell to 45 in May from 45.9 in April; analysts had expected a reading of 46. Of note was the German component of this figure, which registered its biggest single-month decline in three years – down to 45 from a prior reading of 46.2, well short of estimates of 47. The German economy is starting to be affected by problems further south.

UK GDP growth for Q1 has been revised down from -0.2% to -0.3%, while UK 10-year government bonds have hit a record low of 1.740%, with German Bunds and US Treasurys also the beneficiaries of “risk off” trades. The EUR/USD has hit a 22-month low at $1.255, with the Dollar Index (USDX) enjoying a big up day yesterday (+0.74%), settling at 82.09. USDX consolidation above 82.00 is another sure sign of increasing pessimism about the state of the global economy.

China is also becoming a nagging concern. HSBC’s new PMI numbers for the country show another month of contraction – the seventh in a row, and 10th month of the last 11. As in other countries, this is increasing pressure on the Chinese authorities to pursue a “pro growth” strategy, which means the same thing the world over: print more money, increase government spending, and hope that somehow this neo-Keynesian brew revives the masses’ “animal spirits.”

Given that Beijing is sitting on some $3.2 trillion in currency reserves, the Chinese government is arguably better placed to pursue such schemes than its heavily indebted western (and Japanese) counterparts. It seems unlikely though that it will pursue the one course of action that could result in a massive increase in Chinese living standards: allowing the yuan to appreciate substantially.