May 2, 2011
In early trading, silver is down nearly 20% from Friday highs, and just under 15% from its Friday closing fixing, hitting just over $42 in a slide of $6 commencing just after 18:25 pm. The reason for the collapse is not immediately clear, although concerns of a Chinese slowdown and overtightening are rumored to have been among the culrpits. The circumstantial evidence is in the OZ pairs, with the AUDUSD which has long been a high beta proxy for China plunging in early trading as well. Oddly enough, gold has been spared most of the carnage in silver, and was down about 1% in early trading. Overall, this appears to be nothing more than a short covering episode in the USd provoked by nothing factual. We will keep an ear open for any incremental data to determine if there is any actual reason for the plunge, such as for example that the BOJ has suddenly decided not to pick up the baton in trillions of monetizations over the next few months, instead of just another bout of technical selling.
Here is Goldman providing some more color on the Chinese slowdown
April PMI readings suggest weaker growth…
Although the official NBS/CFLP and HSBC/Markit PMIs are supposed to be seasonally adjusted already, they both showed seasonality in their historical April readings (the seasonality in the HSBC/Markit PMI is a lot less consistent and significant than the official one). Considering the seasonal bias, the lower reading in the official PMI and unchanged reading in the HSBC/Markit PMI suggest manufacturing activity growth weakened in April.
…and lower upstream inflationary pressures
The latest reading of the Input Price sub-index (note this is a reference index which does not enter the calculation of the headline PMI), which is highly correlated with the sequential reading of PPI inflation (see Exhibit 4), suggests the latter is likely to show further moderation in April as well. At the same time, with the softening of food (especially vegetable) prices, we are likely to see a meaningfully lower CPI inflation reading as well, perhaps to around 5.0% yoy, down from 5.4% yoy in March.
We believe the underling growth momentum indeed has been trending down despite some data issues…
There have been some controversies regarding the relative reliability of the PMIs versus official “hard” data such as industrial production (IP) as a gauge of manufacturing activities. In March, the PMIs apparently were not strong considering seasonality (headline official PMI went up but much less than the rise in March data historically), but hard data almost across the board showed stronger growth than in January-February. We believe the difference might be the result of unstable seasonal factors in the PMIs and other data complications such as the Lunar New Year effects which often distorts monthly data within the first quarter of the year and changes to statistical standards in terms of official IP/fixed asset investment data (see China: March PMIs suggest activity growth continued to moderate, Asia Economics Data Flash, April 1, 2011 for further details) . Besides, the equal weighting methodology of the PMIs meant when small enterprises move differently from large companies, the PMIs would tend to reflect their changes more than hard data such as IP. Having said that, we believe the trend of the two PMI series is generally reliable and they have both been on a downward trend since reaching a peak in 4Q2010 and there is no clear sign of an imminent change to that trend yet. Within 1Q2011, growth in March probably had a rebound but it appears to be a temporary one.
…driven by continued policy tightening and increasingly prevalent power shortages and possibly a slowdown in exports growth
Our channel checks with commercial banks suggest their lending activities have been under continued pressure from regulators in April. At the same time, there have been increasing anecdotal information on the rise in the actual lending rate (commercial banks are free to charge interest rates above the official benchmark lending rate without a ceiling) as a result of the various quantitative controls. Apart from these conventional monetary tightening tools, the government also seems to be broadening the width of tightening by imposing additional administrative controls on investments in aluminum smelting and production in energy-intensive sectors as a result of the increasingly prevalent power shortage in the country which tends to slow domestic demand growth. Besides, the Export Order sub-index of the PMI has been falling rather quickly since the start of the year which deserves a high level of attention though so far it is somewhat at odds with other information such as our Global Leading Indicator which has been a reasonably good leading indicator of exports growth and it has not shown any meaningful softening.
There are no signs of an over-tightening as yet
Despite the softening of the PMIs, they both stayed clear of the 50% threshold and there has been no dramatic fall in other major economic indicators either. While the 50% threshold may mean something different in China than in many other countries as China’s trend level of PMIs appears to be higher, a slightly below trend level growth is what we would regard as appropriate given there is still a clear need for the Chinese economy to lower its level of inflation.
We expect this policy stance to be kept largely unchanged in 2Q2011 compared with 1Q2011 and the downward trend in activity growth and underlying inflation is likely to continue
We believe given the level of CPI and PPI inflation is still above the government’s comfort zone and activity growth appears to be holding up at a healthy level (yoy activity growth may actually rise further because of a low base in 2Q2010), the growth-inflation combination will mean policy makers are likely to continue to keep the policy stance comparable to 1Q2011 (not March, as the policy stance in January-February was much tighter than it was in March). More meaningful changes to the policy stance will likely come in 2H2011 as yoy CPI inflation is likely to start trending down as a result of a change in base and the expected sequential slowdown.
This article was posted: Monday, May 2, 2011 at 2:55 am