Will the earth, or at least global financial markets, move today?
The Chinese fourth-quarter GDP release is a potentially huge event today and the market consensus is that annual growth will come in around 7.8 per cent. If correct, this will confirm a pick-up in activity from the GDP growth rate of 7.4 per cent in the third quarter, which happened to be the weakest GDP result in China for three years.
In addition to the GDP report, China will today release data on industrial production, retail sales and fixed asset investment.
The forecast pick-up in GDP growth is based on a series of policy stimulus measures during 2011 and 2012, which included a boost to infrastructure spending, and easier monetary policy which included modest interest rate cuts and three reductions in the so-called reserve requirement. The Chinese authorities also acted to support export activity by stalling the appreciation of the yuan.
These policy stimulus measures have been tempered since the middle of 2012 as authorities have focused on a property price boom and concerns over more general inflation pressures. Those concerns were confirmed last week with the data on consumer price inflation showing a rise from a cyclical low of 1.7 per cent in October to 2.5 per cent in December. The consensus is for inflation to rise above 3 per cent during the first half of 2013.
The likely economic growth rebound has been reflected in the Chinese stock market, where the Shanghai Composite Index has risen around 15 per cent in the past seven weeks and there is evidence of firm commodity prices, particularly for iron ore.
With China recovering and on track to register GDP growth around 8.5 per cent in 2013, the world can probably breathe a little easier. Global economic growth will have a solid foundation from China alone, a position aided by a likely robust growth performance in India, decent growth in the US and high hopes for Japan from stimulus measures implemented by the new government of Prime Minister Shinzo Abe. The anchor on the global economy looks like it will again be the eurozone, although recent market conditions suggest the worst will soon be over with rising stock markets and the normalising of bond markets evident in most eurozone member countries.
Meanwhile, global markets were cheered overnight with yet more signs that the US economy was joining the global economic pick-up. Initial jobless claims fell to a five-year low, pointing to further strong job creation in the months ahead and further falls in the unemployment rate. At the same time, the number of housing starts jumped 12.1 per cent in December to an annualised level of 954,000, the highest level in four years. Earlier this week, a measure of home building confidence was also strong.
For the US, the housing sector has been a particularly bright spot with not only strong construction levels, but a clear recovery in house prices evident over the past year. The house price rise, in particular, is good news given it is starting to unwind the wealth destruction for consumers from the 35 per cent peak to trough price crash which also underpinned problems for the banks and the mortgage backed bond market.
For Australia, a period of strong growth in China will be good news. China accounts for 29 per cent of Australia’s merchandise exports and it supplies 24 per cent of all of Australia’s imports, particularly low cost manufactured goods. The export sector is already benefitting from the sharp rebound in iron ore prices and export volumes. A strong China will also benefit Australia indirectly as other countries, particularly in Asia, ride on the coat-tails of China’s remarkable growth performance.
With the US now seemingly on track for a year of good growth and China getting back to strong growth, there are more and more reasons to expect further share price gains and to get set for rising bond yields.