On The Macro Show this morning, Hedgeye Macro analyst Darius Dale discussed the divergence between China's economic reality and the movement in it's equity markets.
Last night, the Shanghai and Shenzhen closed up 1.4% and 3.1%, respectively, taking the handoff from a strong close in the U.S.
Now consider the recent economic data out of China. In November, the country's MNI PMI slipped to 49.9 from 55.6 in October, Dale noted. That jived with recently reported crashing rail freight traffic, along with sequential slippage in industrial production, fixed assets investment, foreign direct investment, total social financing, as well as various measures of supply and demand in the Chinese property market in the month of October.
It's worth noting that China's President Xi Jinping was a bit too honest this week when, in a speech, he admitted the country's economy faced "considerable downward pressures."
As Dale pointed out, that "downward pressure" on Chinese growth is also putting considerable pressure on commodities like copper and iron ore. Here's a telling excerpt from a note sent to subscribers earlier this morning:
"Fresh cycle lows in copper and iron ore are not a good sign for global growth… How bad is it? The China Iron & Steel Association said it expects steel output to drop -2.9% in 2016. That’s not a small inflection considering China’s mills produce half of global output. Former chief economist of Rio Tinto had this to say about continuing deflationary headwinds: “There’s about 300MM tons (~40% of Chinese production) of surplus capacity (in steel refining) that needs to not just be shut down, it needs to be bulldozed.” The deflation continues."