Thursday, August 12 2010
The Australian market was surprisingly weak yesterday seeming to pre-empt the overnight moves in the US. Â The moves have partially been blamed on economic data out in China which confirms the moderating pace of economic activity. Â A list is highlighted below.Â I would think it is reasonably consistent with a soft landing scenario and thus we are likely to see the recent tightening moderate. An area of concern is the inflation data which while in line with expectations remains above 3% and therefore could limit the Chinese authorities scope to loosen policy.
- The Chinese economy showed moderating growth during the June quarter, and July indicators suggest that the moderation has carried on into the current quarter.
- Industrial activity and fixed investment growth continued to ease steadily, influenced by monetary normalisation and policy curbs targeting the property market and local government investment activities.
- On the production side, Industrial Production rose at 13.4% in July against the previous corresponding period (13.7% growth in June).
- On the demand side, July exports rose at a solid 38.1% against the previous corresponding period. The trade balance registered a notable surplus of US$28.7bn.
- Fixed investment rose at a moderating pace of 24.9% during the period from January to July, against the previous corresponding period (suggesting 22.3% growth in July alone). The pace of growth in infrastructure investment peaked in recent months, while real estate investment growth also stabilised somewhat, to rise by 37.2% during the period from January to July.
- Retail sales growth eased modestly in July, to rise by 17.9% against the previous corresponding period, partly reflecting the recent slowing in motor vehicle sales.
- The July CPI inflation rate came in at 3.3% against the previous corresponding period. Food CPI rose 6.8% in July against the previous corresponding period, reflecting the impact of flooding in some parts of the country during the month. Non-food prices rose 1.6%.
The Australian market has underperformed the US and the UK in recent months. Â This appears to be due to the weakness in China. Â What has been surprising has been the strength in the A$ has not accompanied a stronger move into Australian equities. Â Foreign capital appears to be a little cynical about the Chinese economy at present. Â Improvements there will be an important driver for Australia.
Looking for reasons why the US fell last night some pointed to the softer trade data.Â The strength in the US$ relative to the Euro last quarter meant their exports struggled. Â I question whether this is looking backwards.Â The Euro has since recovered somewhat and we already knew this was a risk.Â Â
Others pointed to the move by the Fed to reinvest principal payments on mortgage holdings into Treasuries. Â The effect of this was to ensure liquidity remains strong but the concern is that it signals the Fedâ€™s concerns regarding growth rates. Â Â I think it is probably this issue that has resurfaced as the prime driver last night. Again I would suggest markets have been suggesting growth is slowing in the US so I do not see the Fed move as a particularly strong signal. Â Further market moves were mixed.Â Last night Gold was down, the US$ was strong â€“ weird moves if you were concerned about US growth. Nonetheless the US result season is mostly over so we do not have good results to drive the market from here. Â We will be relying on moderating economic data (expectations have been rebased lower which will help), M&A pick up (possible but tough to rely on) and market looking at the valuation support. Â I would highlight that it would be an intreresting choice for an investor to buy Government bonds at 2.7% for 10 years when you could buy high quality defensive businesses like Procter and Gamble yielding 3.5-4% and growing.
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