China’s recent economic data has sparked interest among investors and analysts alike, particularly as the country’s S&P services Purchasing Managers’ Index (PMI) rose to 52.6 in July, a notable increase from 50.6 in June. This represents the quickest quarter-to-quarter growth in China’s services sector in 14 months, pointing to a recovery taking root in China’s economy. With the increase in the services PMI, we see that the sector is bouncing back. This change would have serious ramifications for global markets as they respond to new and shifting economic indicators.
Meanwhile in the United States, stock markets cheered each sign of a speeding economic recovery. On the Dow’s previous trading day, the DJIA had gained 1.3%. In the interim, the S&P 500 was up 1.5%, Nasdaq up 1.9% this week and the more small cap heavy Russell 2000 was up 2.1%. The rally was led by cyclical stocks and small-cap companies, a sign of investor optimism about the prospects for economic growth.
China’s Services Sector Shows Resilience
China’s S&P services PMI rose to 52.6 in July, showcasing a strong rebound in its services economy. This increase from June’s reading of 50.6 indicates that business activity is expanding, as any reading above 50 signifies growth. The leap to 52.6 represents the most rapid expansion we’ve experienced in more than a year. This trend seems to reflect stronger consumer demand, as the nation continues to make strides in its post-pandemic recovery.
Analysts are encouraged by this increase as an indication of strong demand in expanded domestic and international markets. The services sector is a vital part of the Chinese economy, making up more than half of GDP. As services prosper, this can increase both jobs and consumer expenditures, creating a ripple effect that fuels more economic growth.
Additionally, the uptick in the PMI is not only good news for China. Global investors tend to pay extremely close attention to China’s economic indicators, as they have the potential to shift markets across the globe. Positive sentiment is further supported by a robust recovery in China’s services sector. Such raised confidence would benefit other economies, many of which depend on Chinese trade and investment.
US Markets Respond Favorably
In reaction to the good US economic news, US equity markets staged a powerful rally yesterday. The increase in the Dow Jones Industrial Average of 1.3% shows just how optimistic investors are about the stability and potential for growth of the economy. In like manner, the S&P500 and Nasdaq rose 1.5% and 1.9%, respectively.
Cyclical stocks and small-cap companies were big winners in a remarkable rally. These kinds of stocks do well when investors are anticipating a return to economic normalcy. Analysts are positive about this move, as it indicates deep confidence in the continued economic growth. This is particularly timely too, as the U.S. prepares to show its ISM services PMI later today.
Market participants made the U.S. ISM services PMI report a highly anticipated release. For the latter, they are forecasting an increase to 51.5 in July from 50.8 in June. This projected jump is in line with projections for continued robust economic growth across the U.S. It raises positive sentiment in the stock market to a new level.
European Bond Yields Decline Amid Economic Indicators
Across the Atlantic, European bond markets experienced volatility as government bond yields dropped sharply yesterday. The 10-year Italian-German yield spread returned to the danger zone of 80 basis points. This new movement is the latest expression of long-standing concerns about economic inequality between eurozone countries.
In August, this Sentix indicator for the euro area crashed to -3.7. Both marked major misses 7.0 being the figure generally expected to be seen around now. This drop may be the first indication of decreasing investor optimism for the region’s economic future. Investors have started worrying more about the tail risks that may threaten eurozone growth. Geopolitical tensions and inflationary pressures are top of mind.
Additionally, tightening spreads between core European Union countries and peripheral nations suggest that investors are reassessing risk premiums associated with different economies within Europe. Forward-thinking movements continue to show a powerful picture under the surface as European markets wrestle with unprecedented economic times.