- While we’re likely to see post-winter optical strength in the MAR/APR timeframe, we continue to believe that the trend in domestic economic growth is decelerating and will continue to decelerate over the intermediate term. An acceleration in reported inflation coupled with a slowdown in both house price appreciation and housing sector activity remain our primary catalysts for the aforementioned deceleration in the consumption-heavy US economy.
- This is especially true in the context of consensus expectations that continue to bake in our team’s 2013 bull case as the base case scenario for 2014 and beyond.
- The likelihood that US economic growth continues to slow relative to those expectations should perpetuate what we have been appropriately signaling as a regime change in market leadership that is likely to be supported by the introduction of easier monetary policy (both on an absolute basis and relative to existing expectations) over the intermediate term.
- As such, we continue to favor high-yielding assets (i.e. Treasuries, REITs, Utes), carry trading strategies (i.e. emerging markets) and inflation hedges (i.e. TIPS and commodities) in lieu of consumer exposure and high-growth/high-beta names, at the margins.
- The biggest near-term risk to our view is that likely sequential strength in reported economic data over the next 1-2M is extrapolated as confirming evidence of a consensus bias towards favoring the growth style factor in domestic capital markets. The biggest long-term risk to our view is a Federal Reserve that openly supports a #StrongDollar = #StrongAmerica economic policy. For now, neither risk appears particularly probable.
- Chinese real GDP growth slowed in 1Q14, coming in roughly in line with our and the Street’s expectations. There were some bright spots in the higher-frequency data, but the general trend in Chinese economic growth remains negative.
- That being said, we are of the ilk to side with the now-consistent rhetoric of Chinese policymakers in anticipating that Chinese economic growth is at/near a cyclical bottom from a rate-of-change perspective.
- Specifically, either said policymakers have visibility into the Chinese economy that we lack as investors/analysts or they are effectively signing off on a plan to provide meaningful stimulus if growth continues to slow from here.
- Our favorite leading indicator for the slope of Chinese economic growth (i.e. the slope of the average YoY % change in rebar, iron ore and coal prices) is supportive of the former outcome; the dramatic easing of Chinese monetary conditions and sharp tightening of credit spreads in recent months is supportive of the latter outcome.
- We are currently doing the work to re-quantify the risks embedded in the Chinese financial sector in order to appropriately handicap the probability of a severe and prolonged crisis (conference call date TBD). To the extent we find those risks are priced in, consensus expectations for Chinese economic growth are depressed enough to warrant bargain hunting on the long side of CNY/CNH-denominated capital markets.
US GROWTH CHARTS:
CHINESE GROWTH CHARTS:
RECENT CHINESE GROWTH DATA (in descending order of release date):
- 1Q14 Real GDP: 7.4% YoY from 7.7% in 4Q13 vs. a Bloomberg consensus estimate of 7.3%
- QoQ: 1.4% from 1.7% vs. a Bloomberg consensus estimate of 1.5%
- MAR YTD Fixed-Assets Investment: 17.6% YoY from 17.9% in JAN-FEB
- MAR Retail Sales: 12.2% YoY from 11.9% in JAN-FEB
- MAR Industrial Production: 8.8% YoY from 8.6% in JAN-FEB
- 1Q14 Business Climate Index: 128 from 124.3 in 4Q13
- Large Enterprises: -0.6pts MoM to 132.5
- Medium Enterprises: +3.5pts MoM to 129.4
- Small Enterprises: +5.3pts MoM to 121
- APR MNI Business Indictor: 51.1 from 53.4 in MAR
- MAR Total Social Financing: 2.07T from 938.7B in FEB
- New CNY Loans: 1.05T from 644.5B
- Non-traditional Credit: 544.1B CNY from 17.2B
- Ratio: 26.3% from 1.8%
- SMAVG(3): 22.2% from 28.5%
- The big acceleration in Chinese credit data in MAR would suggest that default risk is being mitigated, at the margins (via refinancing activity), given how poor the broad swath of Chinese growth data has been.
- MAR M0 Money Supply: 5.2% YoY from 3.3% in FEB
- MAR M2 Money Supply: 12.1% YoY from 13.3% in FEB
- MAR FX Reserves: +$128.7B from +$31.9B in FEB
- YoY: 15.8% from 15.4%
- MAR Exports: -6.6% YoY from -18.1% in FEB
- MAR Imports: -11.3% YoY from 10.1% in FEB
- MAR Trade Balance: $7.7B from -$23B in FEB
- YoY: +$8.7B from -$37.9B
- MAR Non-Manufacturing PMI: 54.5 from 55 in FEB
- New Orders: 50.8 from 51.4 in FEB
- New Export Orders: 51.7 from 48.3 in FEB
- Employment: 51.4 from 50.9 in FEB
- MAR HSBC Services PMI: 51.9 from 51 in FEB
- MAR HSBC Composite PMI: 49.3 from 49.8 in FEB
- MAR Manufacturing PMI: 50.3 from 50.2 in FEB
- Production: 52.7 from 52.6 in FEB
- New Orders: 50.6 from 50.5 in FEB
- New Export Orders: 50.1 from 48.2 in FEB
- Finished Goods Inventories: 48.3 from 47.8 in FEB
- Imports: 49.1 from 46.5 in FEB
- Raw Materials Inventories: 47.8 from 47.4 in FEB
- Employment: 48.3 from 48.0 in FEB
- Business Expectations: 62.7 from 61.8 in FEB
- MAR HSBC Manufacturing PMI: 48 from 48.5 in FEB
- MAR CREIS Home Price Index (100 cities): 10% YoY from 10.8% in FEB
- MAR E-House Home Price Index (288 cities): 8.1% YoY from 9.1% in FEB
Feel free to email us if you have any follow-up questions and we’ll be more than happy to walk you through our logic in greater detail. Have a great afternoon/evening,
Associate: Macro Team