Chinese data disappointment will lead to a difficult start to the week

Chinese data over the weekend managed to miss market expectations for every single release: credit growth, industrial production, retail sales, and fixed-asset investment. The miss on the activity front wasn’t a huge surprise given we already saw a levelling off in the PMIs, but the dramatic slowing in credit growth will be raising some red flags in the already reversing commodities space. The China Monetary Conditions Index shows monetary conditions are already at their loosest levels seen since August 2011, when China was just winding down its enormous GFC stimulus package.

The People’s Bank of China (PBOC) published a clarification with the credit data emphasising that the deceleration in credit was due to the pickup in the local government bond swap program and weaker corporate bond issuance. But even when one adds the CNY 350 billion of newly issued provincial debt to the total financing number, it is still considerably smaller than January and March’s number. Also, the much weaker corporate bond issuance may have been impacted by the amount of local government bonds issued. And Chinese retail traders like Wang Aiyi (Auntie Wang), the proverbial Chinese Dama (Aunties) daytraders, are still going to be keen to cut their longs in commodity futures and start going short.

Year-on-year credit growth has dropped below the longer term annual growth, often a sign of a reversal.

The other development that is likely to weigh on commodities this week is the further improvement in US data and the associated gains in the USD. GDP growth is likely to bounce back strongly in the second quarter, and while a rate hike in June is likely out of the question, a rate hike in the third quarter is a very real prospect. US retail sales in the control group, which feeds directly into the GDP calculation, is pointing to a notable recovery in consumption growth in the second quarter.

But what could be an even more positive development is the big month-on-month increase in business inventory growth. Inventory growth has been consistently weakening since late-2011, and a cyclical upswing in inventory growth could have major implications for the US economy.