China reported solid manufacturing data overnight that should conclusively silence the doubts about the continued status of the country’s ongoing “Goldilocks” industrial boom.
The market was expecting the October PMI number to come in at anywhere from 51.7 to 54.5, so the official reading of 54.7 comes as a surprise to just about everyone.
A PMI level above 50 indicates industrial expansion, with higher numbers reflecting a faster ramp-up in activity.
Rising a full 0.9 of a percentage point means that October was actually one of the best one-month periods for Chinese factories since PMI data started in 2004.
There may be plenty of growth in China, but it may come at the cost of feeding inflation. Input prices surged 4.6 percentage points to their highest level since April — when Beijing cracked down on local mortgage lending in an effort to keep the economy from overheating.
As a result, Wall Street now expects Chinese inflation to edge up to 4.5% by the middle of next year, possibly bringing additional — and more aggressive — interest rate hikes from the People’s Bank of China (PBOC) in response.
This may give the yuan a gentle boost over the next 6 to 7 months, although it is more likely that the currency will largely follow the dollar into weaker territory. This will naturally boost commodity prices, but have little bullish impact on funds like CNY (quote) and CYB (quote):
But in the meantime, industrial-heavy funds like PEK (quote) should have nothing to worry about.
The next key date to watch for is in early December, when PBOC lays out its 2011 policy.