Why the decrease in China’s PMI means higher demand for Treasuries

Part 3
Why the decrease in China’s PMI means higher demand for Treasuries (Part 3 of 6)

China’s February PMI release: Impact on companies like Walmart

China’s PMI declines

China’s manufacturing Purchasing Managers’ Index (or PMI) declined for the fourth consecutive month in February, to 48.5, down 1 point from January’s reading. This fall signals continued contraction in the manufacturing sector.

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What caused the PMI decline?

  1. Simultaneous reductions in both the Output and New Orders indices, the first since July 2013, were a leading cause. The New Orders Index posted a modest decline and signaled contraction for the first time in seven months. More importantly, both for the Chinese and global economies, overseas orders fell for the third consecutive month. The decline in new orders led to a decline in purchases of raw materials as well.
  2. Input costs as well as prices of finished products declined as purchasers found increasing room to negotiate contracts amid sales malaise and increasing competition. Factory gate prices declined three months in a row and fell at their fastest pace in eight months.
  3. Employers cut jobs at the fastest pace since March 2009. The Employment Index posted a decline for the fourth straight month in February as firms continued the “job-shedding” trend
  4. Finished goods inventories were almost flat, with the Stocks of Finished Goods Index coming in marginally above the 50.0 mark (implying a very slight increase).
  5. Both finished goods and raw material inventory levels posted modest declines in response to lower orders and production levels.

Last year, Walmart (WMT), the world’s largest retailer announced, that it was planning to close over 20 underperforming stores in China as part of its centralization strategy to cut costs. Coca Cola (KO) reported slower sales growth in China last quarter, holding emerging markets partially responsible for the 8% decline in net income in Q4 2013.

China’s PMI report on Treasury yields and China’s latest manufacturing PMI release are also likely to affect companies like Revlon (REV) as well as fixed income ETFs like TLH and TLT. Read on to Part 4 of this series to learn more.

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