The Chinese economy seems to be slowing down more and more, as indicated by the reading of the NBS PMI for the industry. It fell to 49.6 points in September from 50.1 in August, indicating a recession in the sector. This was the first decline in Chinese factory activity since February 2020.
China's economy is clearly slowing
Readings below the 50-point boundary separating expansion from recession appeared in the indexes of production, new orders, export sales, new purchases, while the employment index fell for the sixth consecutive month, to 49 points. All of this, the report points out, is due to the spread of the delta variant of the coronavirus, higher material costs, and electricity rationing. Cost inflation may be indicated by the reading of the manufacturing cost index, which rose from 61.3 to 63.5 points. In contrast, the outlook for the months ahead deteriorated for the seventh consecutive month.
Europe and USA with the specter of slowdown. What next for indices and commodities?
If the Chinese slowdown spreads to Europe and the USA, this autumn or winter we may observe a situation in which PMI indices in these parts of the world may show recessionary readings at the same time as local inflation records, which in turn may indicate a period of stagflation. Then, investors looking at the stock indices could see somewhat larger corrections, and the currently rapidly rising commodity prices, which are typical for expansions in the phases of the business cycle, could quickly turn back from their peaks. Moreover, this kind of situation could confuse central banks, which on the one hand are trying to support the economy through low interest rates, and on the other hand should chase inflation, as in the US in the 1970s. If this time GDP is more important than CPI, the market playing for a rate hike in 2022 by the Fed and thus strengthening the USD, could change its attitude.
Gold undervalued?
In theory, during a period of stagflation, precious metals, including gold, could be considered a safe haven and a way to store money alongside bonds. Both gold and inflation-indexed bonds may be instruments of choice for investors who, after very strong uptrends, might leave the stock market due to the lack of prospects for improvement in companies' results. Undoubtedly, the upcoming last quarter of 2021 promises to be very interesting and although the temperature in the northern hemisphere will be falling, the one in the markets may be very high.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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