SCOREBOARD: Chinese whispers

Market resilience in the face of China's latest data showed the error in universally negative commentary.

Gains may have only been modest but the S&P500 managed to push higher in every session last week, finishing up just over 1 per cent. It was a similar story with the All Ords, although our market eased off in the final two sessions, largely in response to that weaker Chinese data we saw.

I’ve read a lot of commentary on China following on from those weak trade figures and even the "disappointing” industrial production numbers (growing over 9 per cent per annum!) – and universally it’s all bad. I think that’s a wild misinterpretation though. Chinese authorities have ample scope to provide stimulus to their economy if needed, although I don’t think it’s needed at this stage. Either way, that’ll be the end result, not a hard landing. The fact that markets didn’t tank in response to the data shows, at least partially, that the market broadly agrees. It’s not that the data was entirely brushed off, but let’s face it, last week’s action could have been a whole lot worse.

Of course much of this resilience is based on expectations of more reckless money printing from the Fed and ECB, and that is not a great sign. Markets are too unstable and more so than ever sentiment is almost completely reliant on the continuation of reckless economic policy. There simply is no discipline and it is very threatening to the real economy. How policy makers break this nexus is anyone’s guess, not that they are even trying. In fact the Fed actively encourages it and few people at the Fed seem to understand their actions promote financial market volatility. That’s probably not surprising given that there are few people at the Fed who understand their actions caused the GFC.

So the global captains of industry have to deal with one sector of the economy that is completely out of control and pandered to by policy makers – who in turn need them to buy their bonds. It’s a stupid system and trying to make decisions through the ensuing volatility is no easy task.

With that in mind, and in the Australian context, I took some comfort from the RBA’s Statement on Monetary Policy on Friday. It sounds like they are on hold which is a very positive development. Recall through the bank’s easing cycle how I argued that this was not the environment to be cutting rates. Their actions would destroy confidence. This proved to be correct when business and consumer confidence subsequently fell and even the previous rebound in lending that had been occurring, reversed course following the RBA’s cuts. Why? Because of confirmation bias.

People see the RBA cutting rates in response to all the rot being peddled by doomsayers, and all of a sudden the very positive economic data that we were seeing becomes invisible. People were thinking that if the RBA is cutting, things must be bad, the doomsayers must be right and all the facts must be wrong – confidence weakens. If the RBA can keep a level head and keep rates unchanged (unless we really need them lowered), then this will contribute to stability and help restore confidence. We get some more updates on the confidence indicators this week by the way, with NAB business survey for July on Tuesday at 1130 AEST and Westpac’s consumer confidence survey for August on Wednesday at 1020 AEST.

As an aside, my take on recent RBA rhetoric is that they are every neutral and that the next move could be either way – certainly rates should be higher and more appropriately positioned to deal with both the significant upside as well as downside risks that we face.

All that aside, other data for Australia this week includes motor vehicle sales tomorrow at 1130 AEST and the wage cost index on Wednesday at 1130 AEST. Average weekly earnings are out on Thursday same time.

Looking globally, there is a swathe of data out of the US, but none of it likely to significantly alter anyone’s view. Data has been soft and if it remains so, no surprise, but if it picks up, well one month doesn’t make a trend as they will say.

So we see US PPI and retail sales on Tuesday night, retail sales being the more important of the two. On Wednesday, we see CPI, industrial production, and the empire state manufacturing index. Then on Thursday, initial jobless claims, housing starts, and the Philly Fed index. Friday its quiet with only the Uni of Michigan consumer confidence for August survey.

For Europe just keep an eye on GDP and industrial production data on Tuesday and CPI data on Thursday.

That’s about it, have a great week…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

@AdamCarrEcon on Twitter.

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