Chinese authorities causing concern

With confusion high as to the actual growth measure at the end of the year, the Chinese authorities certainly have been adding to the lack of uncertainty.

Finance Minister Lou Jiwei’s comments on Friday that growth over 2013 could be 7% have been corrected over the weekend, with the new line stating ‘there is no doubt that China can achieve 7.5% growth’.

The fact is no one really knows, however there are signs that 7.5% should be achieved. Firstly, over the weekend M2 money supply increased 14%, which is a strong slowdown from 15.8% in May, and below consensus of 15.2%. Of the 14%, the activities of the shadow banking committee were certainly less prevalent than previous reports, which is certainly a positive and we would expect the Q3 print to come in at similar levels. The GDP print was largely speculated on beforehand, with the China Securities Journal (citing NDRC researcher Wang Yiming) claiming the H1 print would come in at 7.6%, which miraculously it did.

Mr Yiming also said that China would face pressure in H2, although this is not new news for the market. Q2 GDP (year-on-year) printed 7.5%, which was right on market consensus. It’s also worth highlighting that June retail sales easily beat the street’s forecasts with growth of 13.3%, so given the rebalancing that’s occurring towards consumption, surely this is a metric that is going to get more and more attention going forward. On the negative side, industrial production had a reasonable miss, while H1 investment in property developments was up 20.3% - all in all a mixed bag.

The in-line GDP print though was probably the most market-friendly outcome possible, given how good news has been taken badly by the ‘we want stimulus brigade’ and the 1% gain in the CSI 300, 0.5% gain in the Shanghai Composite and short-covering that saw AUD/USD testing the 91 handle is testament to that. Even CME copper managed a modest lift to $3.19p/lb.

US futures have pushed up a touch, helped by China, although some of the impetus for the market has been lowered as Japan is on holiday for Marine Day. As you’d expect USD/JPY has done very little today, although as we said on Friday, it looks supported on dips to 99.00. Prophesying where the pair will end up on Monday is tough as on one hand you have the Federal Reserve Chairman speaking at midnight (AEST) on Thursday, and it will be interesting if he expresses his dovish view on policy, or adopts the tone of the collective FOMC; on the other you have the Japanese Upper House Elections coming up. Still, the message seems clear to us - tapering will start this year if US data continues to go to forecast, the Fed funds rate won’t be going up anytime soon and could be kept low even when employment hits 6.5%, while policy makers would push back if yields get too elevated. The recent May consumer credit at $19.6 billion and June budget figures (showing the largest surplus since 2008) give us every reason to feel tapering will still occur in September.

The upcoming Upper House election in Japan is still in play and should play into our higher USD/JPY call, despite the prospect of a dovish Ben Bernanke. As with anything political, the number of seats is of interest, not just in shaping the Upper house, but also in sending a thorough message that ‘Abenomics’ is working and has the full support of the public. 70 seats is the set target for full majority, although given what’s on offer 79 seats would be the best case for Shinzo Abe and the LDP party, and it would negate the need to include coalition partner, the New Komeito party.

The ASX 200 saw reasonable buying in-line with Asia, and if you look at a five-minute intra-day chart you can see a staggeringly close correction with the Chinese market. The financial space saw good buying, probably helped by another solid auction clearance rate in Sydney over the weekend. Housing seems in a good space right now, especially after May home loan values have hit their highest level since 2009 (up 18.5%). The swaps market is pricing in a 68% chance of August cut and today’s China data dump hasn’t really done anything to change that perception. The materials space is modestly lower, but having broken and closed above the February 15 downtrend, it looks quite interesting helped obviously by BHP and RIO, which have seen good buying of late and will be in focus with production numbers this week.

European calls look promising, although we could see the Portuguese index underperform given its on-going political issues and further sell-offs in its bond market. The French downgrade by Fitch shouldn’t cause too much of reaction, as it was playing catch-up, although the cut to AA+ is a timely reminder that Europe will remain an issue; one can imagine that it won’t be long before it dominates the front pages of the business papers again. Data is light today, however it seems US investors are in buoyant mood, with the consumer discretionary sector up 13 straight days and the overall index just seven handles from a new all-time high.

Citigroup will be the key earnings release, with the market expecting earnings of $1.18 on revenue of $19.77 billion. The improvements should be seen in credit quality with modestly lower provision expenses, although investment banking could struggle. The stock usually performs well on earnings day and has risen four of the last five reports, although it has to be said seldom in recent years has it been up nearly 30% in Q2!

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