China to target lower growth rate

It’s another big week for markets, with the perception of future central bank action firmly driving market price action. 

Source: Bloomberg

Asia has started in earnest and is seeing traders in rather bullish mood. Easing of benchmark interest rates from the People’s Bank of China have helped, although the AUD is not finding any real solace here, as traders seem to be positioning for 25 basis point cut tomorrow from the Reserve Bank of Australia.

The cut to both the deposit rate and lending had been largely speculated on in local media for some time, so it shouldn’t necessarily surprise. The moves were designed to lower ‘real’ interest rates, which have effectively been increasing as inflation has been dropping, in turn creating a tightening of financial conditions. Corporate and household debt stands around 200% of GDP, so servicing this debt equates to a huge 30% of GDP, so the easing measures should make rolling this debt over cheaper. Chinese equities have pushed moderately higher, although the moves in USD/CNH (offshore yuan) have also been noted with the pair testing CNH6.30.

China to target a lower growth rate

This coming Thursday we get China’s National People’s Congress and the likelihood is that we will see the government target a lower growth rate of ‘about 7%’, rather than the current target of ‘about 7.5%’. We should see revisions to the fiscal deficit, inflation and M2 money supply targets.

The Indian market (NIFTY 50) is yet to open, but the futures (traded in Singapore) are up 1.3% and suggest traders are fairly happy with Modi government’s first budget. The world’s investment managers seem to have a love affair with the combination of Modi and Ranjan (head of the central bank) and would be enthused at the government’s plan to boost infrastructure, with total public sector capex expected to rise from 2.7% to 3.4% of GDP. The sizeable cut to the corporate tax rate is punchy and should inspire more global corporations to look favourably at India as an investment destination. It must be said that expectations around the budget were super high, but it seems the budget should do enough to keep the bond market bid and the Nifty 50 to push to new all-time highs.

The ASX 200 eyeing the 6000 level

In Australia the ASX 200 rounded off a very strong February last week and momentum has spilled over into March with 6000 still very much in the markets sights.  China’s easing measures seem to have put a bid in mining stocks, with the sector up 1.5%. If the RBA doesn’t cut rates tomorrow, one suspects there could be some disappointment tomorrow, but after today’s poor Q4 inventory data (-0.8% versus +0.1% expected) and company operating profits (-0.2% versus +0.5%) a rate cut should be delivered. I suspect the current consensus for Wednesday’s Q4 GDP of +0.7% on the quarter should be closer to 0.4% now, which when annualised would be some way below trend.

Glenn Stevens has already detailed some degree of urgency, recently stating that ‘if you feel the case has emerged and it is clear enough, it is usually best to get going on it.’ This seems quite poignant and given what we have seen in some of the key data points of late, not to mention the failure of the AUD to fall after last month’s cut, then it suggests the RBA will bring the cash rate to 2%. The market is placing a 56% chance of this occurring, so in theory we could see a move through the 78 handle on a cut, although the RBA will need to give a sense that we could witness rates going even lower to see AUD/USD test the recent low of $0.7626. There doesn’t really seem any real reason for the RBA to hold off for the April inflation data.

US futures have pushed a touch higher today, although our calls for the European open are mixed. EUR/USD is very modestly lower and traders will be eyeing a break of the 25 January low of $1.1097; judging by some of the trending and momentum indicators, it looks destined to do so potentially this week. There are some optimistic economic signs emerging in Europe, which won’t in any way stop the European Central Bank from easing. When combined with a weakening EUR, it almost seems like the perfect storm for equity appreciation. 

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