Slowing China: chasing the dragon just got easier

Trade and inflation data out of China over the weekend do not augur well for the battered commodities market this week. Export growth massively undershot expectations, declining by 8.3%.

Source: Bloomberg

This is bringing CNY strength into focus, and this could spark moves by the government to lower the currency to increase export competitiveness.

Chinese producer prices also declined to their lowest level since 2009 at -5.4%. This is particularly being driven by oversupply in the industrial and mining sectors, which play a dominant role in the economy for the north and northeast of China. While much of the east coast have developed services sectors and are bearing up well under the slowdown, the government is increasingly concerned about supporting the industrial north.

Further rate cuts and fiscal stimulus into fixed asset investment are likely to be in the pipeline. China has announced CNY 1.3 trillion of stimulus into the second half of the year. However, much of this is moving the debts of the off-balance sheet local government financing vehicles (LGFVs) onto the government balance sheet through formal bond issuance, a process that has been ongoing throughout the year.

Chinese stock markets rallied on news that CNY 900 billion had been spent to support the stock market, out of a total CNY 2 trillion. It will be interesting to see if the poor economic data over the weekend affect the market. Keen attention will be paid to Wednesday when industrial production, retail and investment data are all released.

US Fed: more he says, she says

Non-farm payrolls have pushed the market pricing of a Fed rate hike in September up to 54%. While they came in slightly under the consensus of 225,000 at 215,000, they were comfortably above 200,000 – a key level in most people’s minds. This saw the dollar index rally up to 98.33, but ended up closing at 97.56, down -0.27% for the day.

The market is cautiously taking each major data point in the US and steadily increasing the likelihood of a September rate hike. This week the major data release everyone will be watching closely is US retail sales, which come out Thursday. We also see the Fed’s Dennis Lockhart speaking today. Given that it was his comments that really sparked a lot of the US dollar and treasury market moves last week, it will be important to see if he continues to be firmly in support of a September rate hike. Fed Vice-Chair Stanley Fischer is also scheduled to be interviewed by Bloomberg.


Friday’s Statement of Monetary Policy solidified expectations for the RBA to hold rates at 2% for a prolonged period of time. While the unemployment rate lifted to 6.3% last week, the recent volatility in Australia’s employment statistics mean that the RBA is likely to look through this. It looks like it would take a serious economic deterioration for the RBA to consider further rate cuts. This, combined with Glenn Stevens’ new stated happiness with the AUD exchange rate, is likely to see a slowing in AUD declines.

The ASX at the open

The ASX had a miserable week last week, down 3.6% on the week. This was driven by concern over the major banks’ refinancing needs to meet APRA’s new CET1 10% requirement by the middle of next year. There were also major declines from resource-related stocks like Orica and Iluka last week, indicating further pain ahead for the sector.

Ansell (ANN) reports earnings today. Ansell has made steady progress, announcing cost cutting and seeing increased benefit from their acquisitions, but it is subject to a weak AUD increasing their input costs. The market would be buoyed by further acquisition announcements.

JB Hi-Fi (JBH) also announces today with the consensus for NPAT at A$131 million. JBH’s sales in the software category have been impacted by the launch of streaming services such as Netflix. The market will be keenly looking out for initial FY16 sales guidance and also how much AUD weakness has been affecting margins.

Bendigo and Adelaide Bank (BEN) are expected to report NPAT of A$433 million today as well. Projections are for further solid growth, but much of this has been driven by rising house prices. With APRA’s intent to slow down the housing market somewhat, investors will be looking for BEN’s management to elaborate on how they plan to continue strong lending growth.

NAB have also reported their 3Q unaudited report. The big news out of that is that NAB is sitting at 9.94% for its CET1 ratio after its $5.5 billion capital raising earlier in the year, putting it well ahead of the other Big Four. Bad and doubtful debts were also 15% lower, in contrast to ANZ which saw a 13% increase. This is set to see the stock outperform the other banks today. CBA reports earnings Wednesday morning, and the market is readying itself for it to announce a capital raising of anywhere in the region of $2-7 billion.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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