China data

Thursday, August 12 2010

The Australian market was surprisingly weak yesterday seeming to pre-empt the overnight moves in the US.  The moves have partially been blamed on economic data out in China which confirms the moderating pace of economic activity.  A list is highlighted below.  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.  This appears to be due to the weakness in China.  What has been surprising has been the strength in the A$ has not accompanied a stronger move into Australian equities.  Foreign capital appears to be a little cynical about the Chinese economy at present.  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.  The strength in the US$ relative to the Euro last quarter meant their exports struggled.  I question whether this is looking backwards.  The Euro has since recovered somewhat and we already knew this was a risk. Â

Others pointed to the move by the Fed to reinvest principal payments on mortgage holdings into Treasuries.  The effect of this was to ensure liquidity remains strong but the concern is that it signals the Fed’s concerns regarding growth rates.   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.  Further market moves were mixed.  Last night Gold was down, the US$ was strong – 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.  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.  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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