Tuesday 22 May 2018

Daily Market Update: Markets rally despite latest news of slower growth in China

REUTERS/Petar Kujundzic/Files
REUTERS/Petar Kujundzic/Files

Simon Barry

Figures out overnight show that Chinese GDP growth was slightly weaker than expected in the final quarter of last year.

The Chinese economy expanded by 1.6% q/q in q4 to leave the y/y rate of growth at 6.8% (vs. 6.9% expected), down from 6.9% in q3 and 7.2% a year earlier. By the standards of virtually all other major economies, growth of nearly 7% would be unheard of (Ireland being a notable exception of course!), with the latest figures showing growth in the US and Eurozone at 2.0% and 1.6% respectively, for example. However, current growth in China is sluggish by the standards of its own recent history, with growth over the past 20 years having averaged 9.4%. In fact, the q4 outcome is the third weakest annual growth rate recorded in some 24 years of quarterly readings (higher only than during the financial crisis in 2009 and than in 1999 just prior to the economy’s dramatic lift‐off that took hold in the 2000s).

For last year as a whole, growth averaged 6.9% which (no surprise) is in line with the authorities’ 2015 target, though China’s ability to consistently hit the growth targets set by its leadership is perhaps only exceeded by investor scepticism about the reliability of the figures. For what it’s worth, the 2016 growth target is 6.5%. Whatever one’s view about the extent of massaging of the Chinese data, there is unanimous agreement across the official and private sectors that growth will continue to slow over the course of the coming year. And indeed, some of the high‐frequency data points that were also (separately) released last night continue to point to a moderation of growth momentum. Notably, growth in industrial production eased to 5.9% in December from 6.2% in November (and 7.9% in December of 2014) while year‐to‐date growth in fixed asset investment eased to a 15‐ year low of 10%.

There is, nonetheless, a modicum of encouragement to be taken from other select aspects of last night’s news flow. Retail sales growth posted a third consecutive reading above 11% in December, and a broad if gentle uptrend from the April 2014 low of 10% remains in place – consistent with a more prominent role for consumer spending as a growth driver. And the GDP figures themselves do suggest that the desired rebalancing of the economy’s growth profile (away from property / other investment and manufacturing towards consumer spending and services activity) is taking hold to a degree. That is, while industrial output growth eased from 7.3% in 2014 to 6% last year, services output growth did manage to accelerate from 7.8% to 8.3%. We don’t want to oversell any positive interpretation of this latest batch of Chinese news (as we readily acknowledge that Chinese risks are clearly skewed to the downside), but rather to point out that the incoming newsflow from China hasn’t been as uniformly negative as some recent coverage has suggested.

In terms of market reaction to the Chinese data, stock markets in Asia were mostly higher in the overnight session, with the Shanghai Composite leading the way higher with gains of over 3.2%. While on the face of it curious that a rally would take hold in a session following the release of what were generally weaker than expected economic data, the improvement in investor risk appetite likely reflects building expectations that the Chinese authorities will respond to news of a further slowing in the economy with additional stimulus, as well as perhaps some relief that the data weren’t any weaker than they were.

The pick‐up in risk appetite (oil prices have also come off their lows, up over 3.5% since early yesterday) also needs to be seen in the context of what have been some very sizeable moves in markets so far this year, with momentum to the downside looking like it has eased for the time being. Movements in the major currencies have been more contained than the price action in stocks and energy, but we are seeing some fading of recent downside momentum in sterling, with the UK unit up 0.3% over the past 24 hours against both the dollar and the euro, trading just over $1.43 and 76p as the European session kicks off.

Turning to the day ahead, CPI inflation is published in the UK. Headline inflation picked up to 0.1% y/y in November (mainly due to benign base‐effects owing to sharp energy price declines at the tail end of 2014) and as base‐effects will remain supportive, expectations are for headline inflation to edge up to 0.2% y/y in December. Expectations are for core (ex. energy, food, alcohol & tobacco) inflation to remain at 1.2% y/y in December. However, anecdotal evidence suggests that retailers pursued some heavy price discounting strategies in December, so there may be some downside risk to these expectations – which could put sterling under some downward pressure in the session ahead. Bank of England Governor Mark Carney will deliver a lecture at Queen Mary University of London. Analysts will show an interest in whether Carney’s comments offer support for the current market view that the first Bank of England rate hike will be deferred until the first half of 2017.

In the Eurozone, the German ZEW survey will be the first major January business survey released for the Euro Area and may be seen as an early bellwether for the currency bloc’s resilience in the face of recent global financial market turbulence. The current situation component is expected to decline from 55.0 to 53.1 and the expectations element is expected to fall from 16.1 to 8.0 – which would represent soft readings by the standards of recent history for both.

However, as the survey questionnaire is targeted at investors rather than real economy agents, there is some possible risk of a bigger than expected contraction here (given the context of recent equity market turmoil). If a downside surprise were to materialise, this could potentially exert some downward pressure on the euro, and in the event that UK CPI underwhelms expectations, cap any Eur/GBP gains. The final estimates of Euro Area headline and core (ex. energy, food, alcohol & tobacco) HICP inflation are expected to remain unrevised at 0.2% y/y and 0.9% y/y respectively in December.

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