First, both the HSBC and official Chinese PMI data were better and at good levels for this time of year. There have been no signs that the SHIBOR squeeze a couple of months ago has had a material impact on manufacturing. If anything, activity has actually strengthened. This is also apparent in higher-frequency indicators like steel production and coal burn.
Of note is that the new orders component of the official PMI made a huge contribution to the gains in the headline index in the month. Its hard to fault the gains in the headline index when it is driven by new business rather than the inventory cycle or strong goods production that ends up on shelves rather than consumed.
The Eurozone data were a little better than the flash data, with France now the real laggard from a manufacturing perspective. The improvement in the EU is has more of an impact on commodity demand than the US for most metals, with the chart on the left weighted by copper consumption.
The leading indicators for the US continue to look very bright, with both the headline and underlying components of the ISM index looking healthy.
Actual manufacturing in the US has been pretty poor of late, showing no expansion from levels seen at the start of the year. But this weakness now seems to be fading and it looks like manufacturing in the developed world will be much stronger in the second half of 2013 than the first.
Yields jumped on the release of the ISM, which has been taken as another hurdle jumped to for the Fed to start tapering. Payrolls this Friday will be more instrumental in guiding markets bond markets.
Markets do seem increasingly convinced that the Fed will slow bond purchases, although there hasn't been any strong signals from key players on the FOMC on a change in September. But it does seem to be getting to a point where it is not that important whether its September or December, its clear that markets have mostly priced in the change in view from the Fed on the balance of risks to the outlook. Timing of tapering will probably be second to communication, which the Fed is likely to be extra wary of given they have been surprised by the bond sell-off in the last few months.
For industrial commodities, individual demand/supply dynamics may call for being more bearish than bullish. But I would be very hesitant to short metals when leading indicators in every part of the world are pointing to improving demand.
For copper, it seems that the better news from China has already driven out speculative short interest, with the balance between bulls and bears about even. While strong mine supply for copper is an issue, I am not so sure this will undermine prices when the more visible demand indicators are getting better.
