Tuesday, January 19, 2016

Further modest slowdown in China

China December data on balance reinforces the story of gradual slowdown with policy support moderating the pace of the slowdown.  There is nothing in this set of data to change our view that fears of a hard-landing are overdone.

GDP for the year came in at 6.8% yoy with the annual average at 6.9%.   That’s just below the 2015 target of 7% and above the new target of 6.5% per annum in the 13th Five Year Plan.  The nominal data shows that growth in primary industries were weak over the quarter with secondary sectors (manufacturing, construction) stabilising at a low level with tertiary sector activity (services) remaining the strongest performing sector.

December month activity data showed a further slowdown in industrial production to 5.9% in December with retail sales also slowing to 11.1% in December from 11.2% in November.  Fixed asset investment was also lower than expected, largely due to lower infrastructure investment.  On a positive note real estate investment improved (to less negative) in December.  While house prices have been recovering recently our expectation was that investment activity would remain weak given the still significant oversupply, especially in Tier 2 and 3 cities.

Recovery in property prices has been a key part of our expectation of a soft landing in China.  Property is a far more significant proportion of household wealth than shares.  What happens in the housing market is far more critical for consumer confidence and household spending than the volatility in the share market.

Today’s data comes after last week’s better than expected trade data.  While it could be the case we are near the bottom in the global trade cycle, it's too early to expect a recovery.  Global inventories remain too high to expect any significant pick-up in trading activity any time soon.   Over-invoicing may also have played a part in the result.

Money and credit data was also released last week and while weaker than expected, money supply and credit growth are supportive of the economy generally.  That said financial conditions remain relatively tight with real interest rates still too high.  Further monetary easing is likely in the form of interest rate reductions and cuts in the required reserve ratio.

We still don’t think we’ve seen the full impact of prior efforts to stimulate the economy.  Interest rate cuts, new projects, new subsidies and tax cuts all take time to have an impact but all add up to a significant effort to support the economy.

But its important to remember this is not about restoring old levels of growth.  It's about managing the pace of the slowdown during an important yet challenging rebalancing of the economy to what will ultimately prove to be lower but more sustainable rates of growth in the future.  While there will be fall-out and missteps along that way it will be good for both China and the global growth.  We continue to expect 6.5% growth in China in 2016.

For more on the recent ructions in markets, click here  www.ampcapital.co.nz/news-and-research  for a commentary from our Head of Investment Strategy Keith Poore.

Sunday, January 17, 2016

Weak US retail sales

The softer tone to US activity data towards the end of last week didn’t help alleviate concerns about global growth.  December readings for industrial production and retail sales were disappointing, although they came in a week that also saw solid readings for new jobs openings and hiring along with rises in both business and consumer confidence. Add that to last weekend’s solid payrolls result and the recent data is better described as “mixed”.

Industrial production came in weaker than expected.  Forecasts were already weak given expected declines in both utilities (warm winter weather) and mining (oil).  However manufacturing (three quarters of industrial production) was also softer than expected.

Manufacturing continues to face the challenging headwinds of modest global growth and the higher US dollar.  Lower motor vehicle production also added to the weakness as strong sales and production earlier in the year leveled off as the year came to a close.  

The bigger surprise and of more concern was the weakness in retail spending in December.  Nominal sales fell 0.1% in the month, in line with forecasts.  However sales in the control group (the portion of retail sales that feeds directly into GDP) came in at a weaker-than-expected -0.3% for the month. 

Some of the concern is moderated by the fact that some of the weakness here also appears weather-related with slow sales in clothing stores.  Sales remained strong in other areas such as furniture store off the back of strong construction activity.  Nevertheless the weakness in control group sales will likely lead to further downward revisions to already soft fourth quarter 2015 GDP forecasts to around 1.0% (annualised).

The latest retail spending data is a concern because our positive US economy outlook for 2016 requires the consumer to take the lead role.  Rising aggregate labour income on the back of solid jobs growth, rising average working week and continued, albeit modest, wage gains should support continued solid growth in consumer spending.  We also think we haven’t yet seen much of the benefit of the gain to consumers wallets of lower oil prices flow through to spending yet.  Our forecast also has the services sector taking the major supporting role in the economy this year while the productive sectors and business investment remain soft.  

Right now we believe that story is still intact, especially given the continuing improvement in the key labour market indicators, but we are not blind to risks around our forecast. 

We think global growth concerns are overdone right now.  How the FOMC is thinking about things will become evident following their meeting at the end of January.  The Committee expects to raise interest rates four times this year.  We’ve been expecting three hikes based on the assumption the Committee may want to pause at some point in the year simply to reinforce the point that interest rates are not on a pre-determined path higher.   If markets remain volatile and the data mixed, a pause may come sooner rather than later.

Monday, January 11, 2016

US jobs helps soothe concerns over global growth, but the Renminbi is key to stability

Strong US jobs growth in December went some towards settling share markets towards the end of last week following a few days of general angsting over global growth with a few geo-political concerns thrown in for good measure. But right now the immediate outlook for the Renminbi remains key to stability in  markets.

Non-farm employment rose a better-than-solid +292k in December.  Positive revisions of +50k to prior months added to the positive story.  Strength was centered in the service sectors and construction, with the latter probably helped by good weather.

The unemployment rate was unchanged at 5.0% as the participation rate nudged higher to 62.6%.  Average hourly earnings were flat over the month but the annual rate rose to 2.5% as a negative monthly decline in December 2014 fell out of the annual calculation.  The reverse happens next month as a +0.6% falls out in January.  Looking through the volatility annual wage growth seems to be consolidating at a level just over 2%, which won’t be causing the Fed any sleepless nights.

This result reinforces our view of consumer rather than production-led growth momentum in the US economy.  Last week’s weak ISM manufacturing survey confirmed the sector continues to grapple with energy-related weakness, the higher US dollar and only modest global; growth.  We expect those factors will continue to be a drag on US industrial production and capital spending for some time.

So the US consumer remains key to our view of continued above trend GDP growth in 2016.  A combination of continued jobs growth, increases in the average working week along with modest wage growth is expected to lead to solid gains in aggregate labour income and consumer spending.

But right now global growth concerns remain centered on China.  The latest fall in Chinese shares looks to have been exaggerated and driven more by fears and regulatory issues around the share market and currency rather than a renewed deterioration in economic indicators.

While the Caixin business conditions PMIs were weaker in the last week official PMIs for December were stronger (see post below). Rather the main drivers were worries about new share supply following the scheduled end to a ban on selling by major shareholders, a new share market circuit breaker that commenced on Monday which appears to have added to market volatility rather than calmed it down and a continuing depreciation of the Renminbi.

Looking at each of these: Chinese regulators have since announced a restrictive limit on the size of stakes that major investors can sell; the circuit breaker has now been suspended after the experience of the last week; and after a 6% plus depreciation in the value of the RMB since July the PBoC is now likely to step up efforts to try and stabilise it again much as it did through September and October.

The depreciation of the Renminbi is the key issue at present as its decline is helping fuel upwards pressure on the US dollar, adding to weakness in oil and other commodity prices and contributing to fears of some sort of emerging market crisis, fears that we don’t share.  As the week ended we saw some stability return to the Chinese share market and currency but it needs to be sustained.

Tuesday, January 5, 2016

Don't blame the PMIs

It has been a weak start to the trading year especially for emerging market equities and currencies.  The catalyst appeared to be a decline in a China manufacturing PMI index. 

The Caixin China manufacturing PMI fell from 48.6 in November to 48.2 in December, following two consecutive months of improvement since the low of 47.2 in September.  While this is a disappointing result it is at odds with other indicators, notably the official manufacturing and non-manufacturing PMI’s, which both rose in December. 

Our view on China is unchanged.  We expect a continued modest economic slowdown with some sectors faring better than others as the economy continues to rebalance away from investment and manufacturing towards consumption and services.  

While the PMI may have been the catalyst for the weakness in the China market, other factors are at play including a further lowering of the Rmb and the upcoming expiry of the ban on sales of shares by large shareholders that was imposed during the market volatility late last year.

Looking at other emerging market PMI’s the fall in the India index to below 50 was the biggest disappointment, appearing to be, at least in part, due to poor weather.  The Russia index also fell back to below 50, most likely due to the latest bout of weakness in oil prices.  Mexico also dropped back a touch but remains at an overall healthy level with that economy continuing to benefit from above-trend growth in the United States.

On the upside indices in Turkey, Taiwan, Vietnam, Korea, Malaysia and Indonesia improved.  The Brazil index also rose but the low level of 45.6 continues to highlight the economic (and political) challenges there.

So still a very mixed picture across the emerging economy landscape, but one that is gradually improving, on average.  Capital Economics aggregate emerging market PMI inched higher from 49.2 to 49.3 over the month, its third consecutive increase.  So still under 50, but heading in the right direction.

This latest batch of PMI releases hasn’t changed our view on global growth of 3.4% this year, up from a likely 3.1% in 2015.  While we don’t buy the China hard-landing story, it does represent the most significant downside risk to our forecast.  That said, the Government still has plenty it can do to support growth should it be required.