SCOREBOARD: Chinese check

Chinese data disappointed investors but continued to show surging growth, while QE talk could be weighing on markets.

It never ceases to amaze me that people look at Chinese industrial production growth of 9 per cent, retail spending of nearly 13 per cent and investment of over 20 per cent and then say the figures were disappointing or even soft. The truth is there was nothing disappointing by those numbers (fractionally lower than estimates) which continue show a surging Chinese economy.

Fair to say that these figures used to show much stronger growth rates and production used to be up around 17 per cent, 18 per cent or even 19 per cent last decade. Since then however, the Chinese economy is four times larger and so the actual growth impact of these ‘soft’ numbers for Australia, is much greater than a 17 per cent, or what have you, growth rate of a much smaller economy. China is now about 80 per cent or so of the US economy and about two-and-a-half times the size of Japan’s. How excited would we all be if the US and Japan posted industrial production of 9 per cent and GDP of around 8 per cent.  To suggest the numbers are disappointing shows profound lack of understanding of the changes that have occurred around the globe. Everything is relative.

Markets barely blinked though and commodities were even all weaker, with crude down over 1 per cent to $95, while copper was up 0.5 per cent and gold fell $8 dollars or so to $1428. Very strange outcomes indeed especially considering that over in the US, retail spending was much stronger than expected and that’s with declining petrol prices. Sales were expected to fall 0.3 per cent. Instead they rose 0.1 per cent and excluding cars and petrol prices they surged 0.6 per cent. A great outcome which shows ongoing solid momentum in US consumer spending.  

Equities too didn’t really seem to get much of a boost from strong economic data – data that  confirms the acceleration in global economic activity that we have been seeing in other data indicators. Instead US markets are flat following a similar outcome in Europe. At the close the S&P500 was unchanged at 1633, the Dow was off 26 points to 15091 and the Nasdaq rose 0.06 per cent (3438). By sector, basic materials tech and industrials weighed most heavy but this was offset by gains in health, financials.  

Some suggest that the talk of less QE is weighing on the market and that could be true. But really, none of the key policy extremists (Ben Bernanke, Janet Yellen and William Dudley) at the Fed have indicated they are that way inclined. Don’t forget that Yellen has said that even if there is a substantial improvement economy wise, that doesn’t mean the Fed will taper QE. QE is going to be here for a very long time. Either way, it seems that gains from this point are going to be harder to come by for now.

In terms of the other price action, the Australian dollar still hovers just below parity at 0.9944, 40 pips or so lower than at 1630. The euro was little changed at 1.2973, sterling is 60 pips lower at 1.5295 while the yen is at 101.9. As for rates and following a decent sell-off on Friday, US Treasuries did little overnight. The 10-year is at 1.91 per cent, the 5-year at 0.82 per cent and the 2-year at 0.24 per cent.

Bits and pieces otherwise. The Italians auctioned off some debt (€8 billion) which saw good demand and yields were lower.  There wasn’t much else. So in terms of the Aussie lending data and confidence figures yesterday, they show a mixed picture. One shows that in March – which if you remember was when we saw all the talk was that the easing cycle had finished – new lending spiked which kind of confirms my view that rate cuts are bad for confidence. Similarly, the Reserve Bank’s easing cycle has done nothing for business confidence, which fell and remains well below average and well below what is was prior to this easing cycle. We need to see two things urgently. A halt to the Reserve’s easing cycle and a change of government.

Then there’s the budget tonight, of course, and the government promises to deliver a budget that reflects ‘traditional Labor values’, which of course is code for ‘we are going to bribe our traditional voter base and pay for that with tax hikes from people who don’t vote for us and debt’. The PR spin will be that the government needs to protect jobs in a deteriorating global economy, which is why they need to raise spending, tax and lift debt. As you saw from last night’s data this is just untrue. The global economy is getting much better – but that’s the government for you. Most expect a deficit of around $15 billion this year and something like $5-$10bn next and of course we know Treasury is forecasting sub-trend growth.

Outside of that we see German inflation and the Zew index, eurozone industrial production and for the US, a small business optimism index.

Have a great day….

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