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The sluggish start to activity continues

China, Europe, the US, the UK and Japan – all are expecting one of the slowest starts to an economic year since the GFC.

Traders
Source: Bloomberg

Economic activity remains very sluggish - growth is only inching ahead in most developed economies and appears to be stagnating in others.

Yesterday China saw its lowest read on fixed asset investment (FAI) on record – at 12% annualised growth it is eons away from the record prints just two years ago of 20% or more. What’s more concerning from an industrial commodities perspective is that the property component inside the FAI read has fallen to 6% of annualised growth – also a record low. It is clearly signalling that steel demand is declining faster than expected and likely to stay that way in the future as China reinvents itself as a consumption nation.

Similar conclusions can be drawn from the industrial production (IP) numbers. Yes it snapped back from the worst print in a decade in March to 5.9% in April. However, it was below expectations and still well off the level. Most agree it needs to reach the government’s target of ‘around’ 7% GDP.

The trade balance numbers of the past two months supports what is being seen in industrial production and tells a story of declining exports. The demand for Chinese goods is being impacted by the sluggishness of its two biggest export regions in Europe and the US. Further underscoring the reasoning is the fact Beijing is ramping up its transition from an export/manufacturing nation to a nation with a consuming middle class.

The advantage China has is that its monetary leavers have plenty of room for manoeuvre and expectations of further rate cuts will increase if activity remains at or around current levels. From what was seen yesterday, don’t be surprised if we see a fourth cut inside seven or eight months.

The rest of the world, however, has already pulled most of their monetary policy leavers and are now seeing a decline in growth despite record levels of accommodative policies. The current US data are concerning. If the lofty second quarter GDP targets are to be achieved, May and June will have to be stellar months and completely reverse the hangover from Q1 that looks to be translating into April’s data.

Q1’s 0.2% annualised growth figure was blamed on ‘bad weather’. However, I see several other factors behind why the sluggishness is moving into Q2:
 

  1. First, the date when the Fed will raise rates is unknown. The differing of opinions between members as to when, how and if to move rates is creating uncertainly, which led to mass appreciation in the USD at the start of 2015.

 

  1. The USD’s appreciation on the back of Fed expectations has created major headwinds for earnings and consumption alike. Retails sales, consumer and business confidence, service and manufacturing indexes are all under pressure and declining faster than forecasted. The poor data and slowing growth rates are keeping inflation in check despite employment continuing to power ahead.

    This brings the Fed back into perspective - if the USD is actually doing the job of monetary policy by slowing activity, does the Fed need to move rates this year? The market is certainly asking that question, explaining why the USD is continuing to ease as rate rise expectations fall.

 

A case in point was the reaction in the USD to the stagnant retails sales data drop last night. The USD plummeted against all major G10 currencies with cable, EUR/USD, USD/JPY, AUD/USD all experienced massive movements as the USD was shed.

At 81.08 cents, the AUD has now added 7.6% since the 2 April low and that includes an RBA rate cut, making Australian price competiveness more and more elusive.
 

Ahead of Australian open

For the fourth day in a row, the ASX bucked the futures expectations – can we make it five today? We are currently calling the market down 27 points to 5688 having seen a solid bank recovery on the back of them all technically correcting in the past seven weeks.

However BHP’s ADR is pointing to a 1.7% decline today and, considering the news out of China, that would be a logical conclusion. I would suspect we will indeed log a negative print in Australia.

One stock that should be on your radar is ResMed – a trial study in the US has concluded that its sleeping device actually increases the death rate of patients. Its US listing fell 15% overnight and we would expect the same and even more of a reaction on its Australia listing. The biomedical space this year has had a torrid time, having seen Sirtex shares halved on the release of a key study in March.

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