- On balance, Chinese GROWTH data continued to slow in AUG, while the INFLATION data (CPI) posted a hawkish inflection point.
- While we don’t currently view a breach of the State Council’s +4% target as a probable risk over the next 2-3 months, we do see risk that Chinese inflation accelerates meaningfully into and through 1H13 if the Fed goes to QE3. Furthermore, if the Fed announces QE3 on Thursday, the action would be a meaningful step forward in the Fed’s aggression towards achieving its mandates, based upon how elevated domestic inflation expectations are relative to previous iterations of QE/OpTwist.
- QE3 will likely prevent Chinese policymakers from countering their economic slowdown with further easing measures. That will equate to an incremental drag on global growth – particularly relative to consensus expectations that we believe are currently baking in some form(s) of meaningful policy accommodation in China over the intermediate term. It’s important to note that China alone has accounted for 43.9% of global real GDP growth since 2008, after only accounting for 15.9% in the five years prior.
On NOV 11, 2010, we published a note titled, “CHINESE INFLATION DATA CONFIRMS WHAT WE SHOULD ALREADY KNOW: QE2 WILL SLOW GLOBAL GROWTH”. The conclusion of that note was two-fold:
- “The latest Chinese economic data suggest China may continue with its latest round of tightening measures, as inflation and speculation continue to be a concern. Further, we are starting to see confirmation that QE2 will incrementally slow global growth.”
- “Quantitative Easing = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]”
As the following chart of world Real GDP and CPI trends suggests, that call proved equally as prescient as the Growth Slows as Inflation Accelerates call our team made in 1H08.
Almost two full-years and countless data points later, we are at a similar juncture with respect to the outlook for global GROWTH and how that outlook may be impacted by POLICY decisions out of the Federal reserve. Today, Global Macro analysis remains as reflexive and proactively predictable as it was then: GROWTH and INFLATION data lead future POLICY adjustments; those POLICY adjustments lead future GROWTH and INFLATION data.
Regarding China specifically, the country’s AUG GROWTH data came in broadly weaker as the AUG INFLATION data accelerated (CPI). Below is a compendium of the reported AUG economic data (New Loans, Money Supply, FDI and Property Prices are all out later this week). The following three charts highlight the deltas in the series we think are most important to focus on at the current juncture.
- AUG CPI: 2% YoY from 1.8%
- Food: 3.4% YoY from 2.4%
- Non-Food: 1.4% YoY from 1.5%
- AUG PPI: -3.5% YoY from -2.9%
- AUG Industrial Production: 8.9% YoY from 9.2%
- Steel Products Production: 2.4% YoY from 7.3%
- Cement Production: 7.2% YoY from 4.4%
- Processing of Crude Oil: 2.6% YoY from 0.3%
- Electricity Production: 2.6% YoY from 2.3%
- AUG YTD Urban Fixed Assets Investment: 20.2% YoY from 20.4%
- Real Estate YTD: flat at 20.9% YoY
- Construction YTD: 15% YoY from 19.6%
- Local Projects YTD: 21.6% YoY from 22%
- Mining YTD: 18.6% YoY from 18.8%
- Manufacturing YTD: 23.9% YoY from 24.9%
- Sources of Funds for Fixed Assets Investment:
- State Budget YTD: 26.9% YoY from 30.5%
- Domestic Loans YTD: 7.1% YoY from 6.7%
- Domestic Loans Earmarked for Real Estate Investment YTD: 11.2% YoY from 8.8%
- AUG Retail Sales: 13.2% YoY from 13.1%
- AUG Exports: 2.7% YoY from 1%
- To US: 3% YoY from 0.6%
- To EU: -12.7% YoY from -16.2%
- AUG Imports: -2.6% YoY from 4.7%; lowest since OCT ‘09
- AUG Manufacturing PMI: 49.2 from 50.1; lowest reading since NOV ‘11
- Input Prices: 46.1 from 41
- New Orders: 48.7 from 49
- New Export Orders: flat at 46.6
- Employment: 49.1 from 49.5
- Output: 50.9 from 51.8
- Backlogs of Orders: 45.1 from 41.9
- Imports: 47 from 45
- AUG Services PMI:
- SA: 47 from 45
- NSA: 56.3 from 55.6
- AUG HSBC Manufacturing PMI: 47.6 from 49.3; lowest reading in the YTD
- AUG HSBC Services PMI: 52 from 53.1
- AUG MNI Business Sentiment Indicator: 47.5 from 49.7
- New Orders: 47.5 from 52.3
- Production: 44.7 from 49
While we don’t currently view a breach of the State Council’s +4% target as a probable risk over the next 2-3 months, we do see risk that Chinese inflation accelerates meaningfully into and through 1H13 if the Fed goes to QE3 (upcoming FOMC decisions: 9/13 and 10/24). As we penned in the conclusion our JUL 25 note titled, “CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY”:
“We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.”
It’s important to note that Chinese interest rate markets are pricing in LESS, NOT MORE, monetary easing amid the acceleration of QE expectations in recent weeks:
We’ve written a compendium of work outlining why we don’t think Bernanke will be able to announce QE3 before the NOV elections in the US; the two most recent notes worth reviewing are listed below:
- WILL ROMNEY AND RYAN FORCE BERNANKE INTO A BOX? (8/15): “As we’ve previously stated, political headwinds, especially from Romney and Ryan, will serve to inhibit further monetary easing out of the Fed between now and election day.”
- FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA (8/22): “The political rhetoric surrounding the inflationary impact of quantitative easing is poised to accelerate meaningfully from now through the general election, potentially keeping the Fed on hold with respect to that duration.”
All that being said, what we think Bernanke will/should do is often divergent from the path he has chosen to take. As such, the more wrong we are on what he does with respect to US monetary policy over the immediate-to-intermediate term, the more right we will be on global growth (slowing). $150 crude oil on the back of the Federal Reserve’s “shock and awe” interest rate cuts helped produce a global economic recession during the last US presidential election year; will Bernanke go for [black] gold this time around?
While the answer to that question remains uncertain at the current juncture, we do know that if he does pull the trigger on Thursday, the action would be a meaningful step forward in the Fed’s aggression towards achieving its mandates. The Fed’s proprietary 5yr breakeven index is currently at 2.48% (down from 2.8% in MAR) and the TIPS breakeven index is currently at 2.04% (down from 2.2% in MAR). In the past, the Fed has typically gone to QE/OpTwist around 2-2.2% on their index and following a 80-100bps cyclical decline on the more-volatile TIPS index.
Best of luck out there this week,