SCOREBOARD: Rattled by China

Last night markets were being rattled (again) by news that China is trying to restrain credit growth. The government apparently telling some banks to pull their lending in. Nevertheless, I don't get the impression that the Chinese government is trying to slow the economy and certainly these steps aren't aimed at that. We need to listen to Wen Jiabao when he says that reasonable and ample growth in money supply and credit will be maintained.

So buy these dips. The measures conducted to date are all about mopping up excess liquidity, restraining some excesses and reducing credit risks. All of which are big positives for sustainable growth. Banks at the moment appear to be front loading lending with new loans in the first few weeks of January (as I mentioned a little while ago) surging Rmb 1trn. If this was maintained it would easily eclipse the annual target for news loans (which is something like Rmb 7trn). So don't worry then if the government says to some banks "ease off for a month or so, no new lending”. It doesn't change the big picture, although it does highlight how easily the market is moved by any potential threat to growth – once bitten twice shy I guess.

It follows the falls we saw on global equities last night, which were a serious over reaction – but as is often the case, it exposes a good opportunity. European indices were smashed – the Dax down 2.1 per cent, FTSE100 down 1.7 per cent (Rio, Bp hit hard) and Euro Stoxx down 1.5 per cent. In the US, the S&P500 is down about 1.1 per cent (1138) as I write with basic materials and energy being hit hardest (as commodities tumbled). Oil on Nymex dropped 2.4 per cent ($77.15), gold was down $24 ($1113) and the CRB index fell 0.7 per cent to 279. The interesting thing is base metals were mixed with nickel up 2.1 per cent and zinc up 0.5 per cent.

Another reason you can feel a bit more comfortable about things is that US banks are generally profitable again and there are signs of stabilisation on the credit loss front where banks aren't profitable. Indeed on a night of general carnage, financials outperformed (falling 0.2 per cent). Banks that reported last night included BoA which lost about $5.2bn in Q4 or $194m excluding TARP repayments (BoA is currently up 1.2 per cent). Wells Fargo reported a $2.8bn Q4 profit and record revenues of $22bn for the quarter and $88bn for the year. US Bancorp and M&T bank also reported good results. Looking at the other indexes – the Dow is currently off 122pts (10603), the Nasdaq is 1.2 per cent lower (2291) and the SPI is down 0.7 per cent (4808).

On the rates side there wasn't a lot happening. On a comparatively narrow range the 2-yr yield was unchanged at 0.88 per cent, 5-yr fell 1bp to 2.4 per cent while the 10-yr fell 2bp to 3.66 per cent. Aussie futures were on a 7/8tick range and ended 4/5 ticks higher on the 3s (94.92) and 10s (94.44).

FX was driven by the China story, a lift in US dollar seeing most major currencies off just under a big figure. Australian dollar is at 0.9088, euro is at 1.4104, sterling is 1.6285 (only down 17pips). Just note (and while it was announced last year), Russia started buying Canadian dollars reducing some of it US dollar holdings.

In terms of the data out, it was generally pretty good. There was a bit of a scare when US housing starts fell 4 per cent to 557k in December (575k expected). But, the prior months starts were revised up and building permits surged (11 per cent), which offset the unexpected weakness in actual starts. On a more positive note, mortgage applications surged in the week to January 16, up 9 per cent (purchases 4 per cent, refis 11 per cent) after a 14 per cent rise in the week prior. Otherwise US PPI was flat in December (core up 0.9 per centy/y from 1.2 per cent prior), German producer prices went from -5.9 per centy/y to -5.2 per cent in the same month, Canadian CPI fell 0.3 per cent (-0.2 per cent expected) with the core annual rate stable at 1.5 per cent. Finally in the UK, claimant count unemployment was steady at 5 per cent (ILO dropped to 7.8 per cent from 7.9 per cent) with jobless claims falling 15k in December.

I know this is a long report already but there are a few issues I quickly want to discuss about the NZ CPI yesterday. I received a few emails asking to elaborate on why I didn't think the result presented a downside to Aussie CPI. Again, while I want to reiterate there used to be a pretty good correlation at one stage, this isn't the case anymore and certainly this latest quarter will show another departure I think. Firstly, a big chunk of the fall in NZ CPI was driven by food and a very big chunk of that was fruit and veg (down about 12 per cent). Now here's the thing. The relationship between Kiwi and Aussie fruit and vege has, if anything, been inverse over the last couple of years. They rose 6.6 per cent in NZ last quarter while in Oz, fruit and veg fell about 6 per cent.

The other thing to consider is that rental increases, in fact housing in general, made almost no contribution to NZ CPI this quarter (less than 0.05 per centpts). Now at about 22 per cent of the index that's significant. In contrast, the equivalent components in Australia regularly make a solid contribution to inflation as do booze and cigars (both of which made a modest detraction in NZ). Then there is that 8 per cent of the Aussie CPI attributable to financials services. Anything other than a solid rise here I reckon we can dismiss as a work of fantasy – we know bank margins have been rising, albeit mitigated to some extent by a modest reduction in some fees. So there you go.

Today, watch out for Kiwi retail sales (0845), the NZ PMI and then motor vehicles in Oz (1130). There is a barrage of Chinese data at 1pm – GDP, retail sales, industrial production and inflation. Tonight watch out for US jobless claims and the Philly Fed index – if you're interested the BoC release their monetary policy report.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.