May 13, 2016

Markets Today: China Matters

In a shock revelation, the Dallas Fed has published a note on its website saying that the impact of the Chinese economy on the U.S. has notably increased over the past two decades.

Friday the thirteenth. Be careful out there.

In a shock revelation, the Dallas Fed has published a note on its website saying that the impact of the Chinese economy on the U.S. has notably increased over the past two decades. We could have saved them the number crunching. One of the charts this (less econometrically-educated) author was fond of showing clients last year, noted that compared to the Fed’s previous tightening cycle back in 2004-2006, China’s economy has expanded from about 17% to 60% of the size of the U.S. economy.  We mention this by way of segue into the fact that that today is likely to bring the keenly-anticipated China loan data for April, and on Saturday the slug of monthly activity readings covering industrial production, retail sales and fixed asset investment.

Not a big night just gone, but a fair amount of FX volatility. AUD sits at the foot of the G10 leader board, extending its losses after taking a mild hit during our time-zone yesterday from the fall in the usually little-noticed inflation expectations reading. The NOK sits at the top, in conjunction with WTI crude oil prices hitting a six-month high (briefly above $47) after the IEA said global oil stocks would experience a drastic reduction in the second half of the year on the back of strong demand and falling supply by some major producers. CAD also benefited from higher oil. Other commodity prices – base metals in particular – are slightly softer.

GBP is also higher following the 9-0 vote for unchanged Bank of England Policy. There had been some speculation of dissent(s) in favour of pre-emptive easing ahead of the 23 June EU referendum. On this, the Bank’s forecast assume that the government’s declared policy of “Remain” comes to pass and while it’s medium term growth track is lower than in February, Governor Carney described the outlook as ‘far from gloomy’.  Under a “Leave” scenario, the Bank notes potentially severe downside risk for Sterling – and with that higher inflation. In the EM world, the Brazilian Real hasn’t shown much reaction to the news that the Senate voted 55-22 in favour of impeachment proceedings against President Rouseff – a widely expected outcome.

US stocks have recouped their mid-session, technology-led, weakness to be close to flat into the close, while US Treasury yields are mostly 2-3bps firmer (following the lead from Europe) and so failing to respond positively to the night’s one economic release showing a big jump in weekly jobless claims (294k vs 270k expected). Earlier Eurozone industrial production fell by 0.8% against expectations for unchanged.

Coming Up

At the end of a week that has lacked much by way of tier-1 data or events this all changes today. April US retail sale is the U.S. highlight. Though the survey consensus is for a strong rebound after the weak March prints (+0.8% m/m for headline, +0.5% ex-autos) markets are likely to be braced for downside surprises following this week’s poor earnings results from Macys, Walt Disney and Fossil. Also important will be the preliminary University of Michigan Consumer Sentiment Index and including the latest readings on inflation expectations (the 5-10 year reading is one the Fed pays a lot of attention to). Consensus for the headline sentiment index is for a rise to 89.5 from the 89.0 April final read.  PPI is also due.

In Europe, Germany issues its preliminary estimate of GDP, expected to show +0.6% q/q, and a few hours later we get the Eurozone preliminary estimate. We’ve already had the equivalent of a ‘flash’ estimate, at 0.6% and this is accordingly the consensus estimate. We’d suggest some downside risk to this.

In our time zone, it’s quite likely that China will release April lending and money supply data. After the sharp acceleration in growth in both New Yuan Loans (NYL) and Total Social Financing (TSF) in March – seen to be the result of state owned banks being compelled to step up lending – there  is keen interest in whether April has seen a sharp slowdown. The market expects so, looking for NYL of just 800bn after 1,370bn. in March and TSF of 1,399bn down from 2,336bn.

If we do see a particularly sharp drop, this is likely to play with the grain of the softer AUD. If loan growth hasn’t fallen that much, concerns about ongoing reliance on credit to maintain expansion and hence still rapidly rising debt levels, could weigh. How’s that for a glass half-empty view?

Saturday brings the slug of China April activity readings, covering industrial production, retail sales and fixed asset investment. Industrial production is expected to show 6.1% y/y growth up from 5.8% last time and will likely be the most important of the three releases.


On global stock markets, the S&P 500 is flat.  Bond markets see US 10-years +1.14bp to 1.75%. On commodity markets, Brent crude oil +0.71% to $47.94, gold-0.5% to $1,270, iron ore -0.9% to $55.05. AUD is at 0.7323 and the range has been 0.7313 to 0.7368.

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