Scoreboard: Finer China

Judging from the action on Friday night, it’s going to be a quiet one for our market today. About the most exciting thing of note is that the Australian dollar is trading around 0.8717, or 40 pips lower than Friday afternoon. Global stocks otherwise didn’t do much - the S&P500 fell 0.4 per cent, the Dow rose 0.3 per cent and the Nasdaq was off 0.5 per cent.  And that’s with some more data showing growth at multi-year highs. US industrial output this time, and it’s around a 3½ year high.  Admittedly other data out was less supportive. Housing starts for instance fell almost 10 per cent in December, although that follows a 23 per cent surge the month prior. Similarly the University of Michigan estimates that consumer confidence slipped in January - two points to 80.4. European equities were up around 0.2 per cent-0.3 per cent and our SPI was pretty much flat (off 2 points). 

Now that may change today when we see what the Chinese GDP numbers hold (1300 AEDT today). There are plenty of folk who are worried by a China downturn again this year, although to be fair they have been worried every year. It’s like the proverbial broken clock. Is this the year? I doubt it,   but look when you think about market moves it probably doesn’t matter what the Chinese economy actually does. What matters is the debate around it. I mean Greece didn’t leave the eurozone nor did the eurozone break up did it - these were only ever very small probability events. But both of these outcomes had high probabilities attached to them by the market though, given the hysteria.  

Anyway we also get industrial production and retail sales from China. The consensus of expectations is same old really - GDP around 7.5 per cent, industrial production around 10 per cent and retail sales around 13 per cent. That’s very strong growth in each and every case. Don’t forget that China is a $9 trillion economy now - the size of Japan and Germany combined. And it’s growing at 7.5 per cent per annum. I don’t think it makes much sense to talk about China slowing to be honest. Nine trillion and 7.5 per cent.  

So, today is likely the most exciting day in terms of the global data. There actually isn’t much in the US – it’s Martin Luther King Jr. Day today (so most markets are closed) and I guess everyone will be focussed on corporate earnings out during the rest of the week. Macro wise you get stuff like existing home sales and jobless claims, but it’s pretty quiet otherwise. With that in mind I’m going to be particularly interested the Bank of England’s minutes out this week. The UK economy is much stronger than expected, the unemployment rate has fallen sharply to 7.4 per cent. Just like in the US, the unemployment rate is fast approaching a level where the Bank of England said it would consider a rate hike.  My view at this point is that the bank has no intention of hiking rates even if the unemployment rate falls below 7 per cent. I could be wrong, but I can only go on past behaviour and central banks have a distinct preference for moving the goal posts rather than actually sticking to the economic targets they themselves set.  Thus the importance of the minutes - we’ll either get the new excuse (I’m pretty sure we will), or I’m wrong and the BoE will be sensible about things and start prepping the market for a possible hike.

For the Aussie market the two key releases will be the consumer price index and consumer confidence figures - both on Wednesday at 1130 AEDT and 1030 AEDT respectively. At this point the consensus forecast, collated by Bloomberg, is that CPI on both a headline and core measure rose about 0.5 per cent, with annual rates little changed at 2.3 per cent. My own experience is that CPI rose quite a lot more than that. As a broader observation, CPI is low for two reasons only - food price growth is the lowest in about 50 years and then there’s the Australian dollar.  The Reserve Bank board, and some industrialists who pull their strings, want a lower Australian dollar at all costs. This will lift inflation -- and of course I am very sceptical that food prices can continue to buck the global trend. When they turn, we could find CPI closer to 3 per cent than 2 per cent.

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

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