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The country’s Q1 GDP came in bang in line with expectations at 7%, remaining well within the target range set by officials. However, there was a moderation in fixed asset investment and retail sales while industrial production dropped off significantly.
The drop off in industrial production is consistent with the fall in manufacturing activity and decline in exports. While the headline will be around growth slowing to its weakest since 2009, market pricing was already aggressively skewed towards a miss today.
In fact, many analysts were actually looking for a slip below the 7% handle. This was driving expectations for further imminent stimulus with the ‘bad news is good news’ stance in full effect.
As a result, it didn’t take long for Chinese equities to unwind some of the gains we’ve been seeing recently. The Hang Seng and Shanghai have both turned negative on the back of the data and it’s clear stimulus speculation has spurred equities to outperform economic reality over there.
This also explains the frothy valuations we’ve been seeing in mainland equities. Investors will now be wondering whether the disappointment in other parts of the economy is still enough to see officials spring into action.
Measured stimulus is already being injected but what the market really wants is all-out stimulus like we used to see in the past. Unless the growth rate really drops off the 7% target, officials are likely to remain content and focus on reforms.
ASX 200 just holding on to an uptrend
The ASX 200 has been struggling for most of the day as local investors go through a fairly confusing time. We have a situation where the economy is going through a tough time yet it remains debatable whether another rate cut is imminent.
Westpac’s consumer sentiment reading showed a drop in consumer confidence and, given the fact unemployment is more likely to rise than not, this is only likely to get worse.
At the same time our key trading partner, China, seems content with much slower growth. The impact this is having on the mining sector is only the beginning as other mining-dependent sectors are backed into a corner.
While iron ore bounced yesterday, the demand/supply factors haven’t really changed and subdued prices could hang around for a while. With growth limited, investors will continue to hunt for yield and rates expectations will dictate price action.
Tomorrow’s jobs numbers will be quite significant and, given the market is expecting a decent amount of jobs added, there is risk of disappointment. Perhaps this is why AUD/USD has also remained sidelined around the $0.7600 handle.