2 Big Bumps We Hit Today

09/29/2011 2:51 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Fasten your seat belts…it could be a bumpy ride tomorrow.

Two economic numbers, one from China overnight (from a US perspective) and one from the United States before the New York market opens, have the power to move stocks in the current very volatile environment.

The Chinese number is the official version of the preliminary manufacturing purchasing managers’ index (PMI). The preliminary version, released by HSBC and Markit Economics on September 22, showed the manufacturing PMI falling to 49.4 in September from  49.9 in August. Any index level below 50 indicates that the sector is contracting.

The Shanghai Composite Index fell 2.8% on September 22, and has been dropping since. As of September 29, the index was down 5.9%.

The fear is that the drop in the manufacturing PMI signals that China’s economy is slowing more than expected, and that projections for 8.2% to 8.5% GDP growth in 2012 are still too high and will have to come down—bringing company earnings and stock prices with them.

But the preliminary PMI only includes data from about 85% to 90% of the companies in the fuller survey that will be released tonight. That extra 10% to 15% might not seem like a big deal, but the missing surveys tend to come from China’s biggest state-owned companies.

Not only are these companies major exporters, but since they have ready access to financing from the country’s state-owned banks, they haven’t been hit as hard as the smaller companies by the lending slowdown engineered by the People’s Bank. Anecdotes and data from China indicate that smaller companies are starved of capital right now.

The market hope is that the full PMI number will hang above 50. That wouldn’t be totally unexpected, since it has stayed above that level for the last two months even as the preliminary PMI moved below 50. The fear, of course, is that the full PMI will finally confirm the drop in the preliminary survey.

Then, at 8:30 a.m. New York time, the US Census Bureau is set to release data on personal spending for August. In July, spending climbed a very strong 0.8%. With consumer spending accounting for 70% of US economic activity, that strength was good news for investors hoping that the US economy will avoid slipping back into recession.

The consensus forecast now, according to Briefing.com’s survey of economists, is that personal spending will show an increase of 0.2% for August when the figures are announced tomorrow.

A positive surprise in this number tomorrow would reinforce the modest good news from today’s economic data. Initial claims for unemployment fell to 391,000 for the week ended on September 24, from 428,000 the previous week. (The Department of Labor did warn, however, that mistimed seasonal adjustments may have made the drop look bigger than it was. I said the good news was “modest.”)

Today also saw the release of the third revision to second-quarter GDP growth. The revision took growth up to 1.3% for the quarter from a 1% annual rate in the previous revision. Economists had been looking for a revision to 1.2%, according to Briefing.com.

The danger in tomorrow’s US data is that the modest good news today may have set the market up to hope for good news on consumer spending.

Like I said, fasten your seatbelts.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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