China factories scent hint of spring, Europe still chilly

Activity in China's vast factory sector grew for the first time in nine months during March to bring a hint of spring to the global economy, although growth remained weak in Europe, leading to a muted response in financial markets.

A survey due later on Friday is expected to show the United States enjoyed a return to growth after five months of contraction alongside another strong jobs report.

Headlining in Asia was a rise in the official version of the Chinese Purchasing Managers' Index (PMI) to 50.2, beating forecasts and above the 50-point mark that separates growth from contraction.

The private Caixin/Markit PMI found output, total new orders and output prices all returned to growth, while a survey of the service sector surprised with its strength.

"It does seem to indicate that the manufacturing sector is warming up a bit," said Raymond Yeung, senior economist at ANZ in Hong Kong. "New orders were up 2.8 points, which is a very strong figure."

"We think there are basically two factors driving the recovery: the first is a possible acceleration in infrastructure spending. The second is a broader pickup in external demand."

However, while euro zone factories rounded off the first quarter in slightly better shape than initially thought the growth in activity remained weak despite the deepest price-cutting since late 2009.

The euro zone survey suggested manufacturing is still dragging on the wider economy. It came soon after the European Central Bank unleashed a bold easing package in its latest attempt to spur growth and drive up inflation - which at - 0.1 percent in March was nowhere near its 2 percent target goal - but it doesn't seem to be working yet.

Despite the price-cutting and ECB stimulus, Markit's PMI for the euro zone only rose to 51.6 from February's yearlow of 51.2, only slightly better than an earlier flash estimate of 51.4.

The bloc's economy grew just 1.6 percent in 2015 and the first quarter's PMIs suggest there will be little improvement anytime soon. "The softening of forward looking components in the past two months is consistent with our scenario of a slower growth in Q2-Q3," said Apolline Menut at Barclays.

Looking at the country breakdowns, growth remained weak in Germany and activity contracted in France but Spain, Italy, the Netherlands, Austria and in particular Ireland saw robust expansions.

In Britain, outside the currency bloc, manufacturing growth edged up in March from its weakest level in nearly three years, suggesting the sector will contribute little to economic growth in early 2016. The relatively upbeat Chinese surveys should give some comfort to Federal Reserve Chair Janet Yellen who this week cited the global risks emanating from there as one reason to be cautious on raising U.S. rates.

Yet, China watchers still suspect more support will be needed from Beijing, especially if it wants to avoid a politically unsettling rise in unemployment.

Ratings agency Standard & Poor's underlined the need for faster reform when it changed China's credit outlook to negative on Thursday.