Dominating headlines today was China’s NOV trade data. Import growth, while still in contraction territory, improved sequentially and is now accelerating on a trending basis. Counterbalancing that was continued softness in the rate of Chinese export growth – which was essentially unchanged from OCT – as well as sequentially soft trade balance figures.
Weighing on sentiment was the PBoC’s decision to set the USD/CNY reference rate to the second weakest level since the August 11th devaluation (6.4078 vs. 6.3985 prior). Both the spot and reference rate are now trading at/near ~four-year lows. It didn’t help sentiment that this policy adjustment came in conjunction with data that showed China’s FX reserve balance plunged -$87.2B in NOV (the third-largest decline in at least 10Y) to the lowest absolute level since FEB ‘13.
Despite the aforementioned [marginal] shift in FX policy we continue to believe the CNY is not at risk of a material one-off devaluation. The August devaluation was not intended to promote export growth as bandied about by Western financial media, but rather to correct a longstanding imbalance that had developed between the spot and reference rates. That imbalance remains corrected – for now at least.
The Chinese economy could obviously stand to benefit from a material devaluation of the CNY (CLICK HERE for more details), but instead of incremental sharp devaluation(s), we believe the PBoC is likely to guide the CNY 15-20% lower vs. the USD throughout the next Five-Year Plan.
Investors should expect Beijing to favor stability over destabilizing devaluations that would perpetuate an acceleration of already-rapid capital outflows. NDF spreads – while certainly still pricing in continued weakness in the CNY and CNH over the NTM – would seem to suggest as much.
We don’t want to belabor our thoughts on the Chinese yuan, which has become one of the top 2-3 topics de jour in our recent client discussions. For our more expansive thoughts on this topic as well as on the Chinese economy in general, please review our 11/19 note titled, “Can Beijing Maintain Exchange Rate Stability Or Is the Chinese Yuan the Next Thai Baht?”.
In short, with key high-frequency growth indicators continuing to consistently come in on the lower end of historical ranges and various measures of inflation continuing to decelerate on both a sequential and trending basis, it only makes sense for Western investors to anticipated increased policy support to combat this #Quad4 setup, at the margins. But with 1Y OIS pricing in a stable outlook for policy rates (-5bps spread vs. benchmark 7-Day Repo Rate; ~flat over the past 3M) we continue to pound the table on our belief that Beijing will continue to do what we think is necessary per the structural headwinds we’ve identified throughout the Chinese economy – i.e. continue downshift GDP growth in an orderly manner.
Shifting the discussion back to the title of this note, China’s NOV trade data is confirmatory of a core belief we have at Hedgeye: global growth continues to decelerate on a trending basis, which implies that it did not bottom in OCT like some of our competitors claim it has.
I personally don’t know how one can look at the following chart of global export growth (IMF data through 3Q) or the following chart of export growth trends across each of the G20 economies and say that global growth has “bottomed”. Admittedly, I’m never in competition for being the smartest guy in the room when Keith and I visit with clients, but still…
Surely the key risk to the reflationist view is that global demand growth just never shows up. That is certainly is what is being implied by the current rate of global export growth. Per the following reasonably tight correlation, it is reasonable to expect that global growth decelerated to somewhere around flat YoY in 3Q15.
Admittedly, however, there is upside to that forecast given the relative resilience of the U.S. consumer, but as we highlighted in our 11/25 note titled, “Can’t Sneak #GrowthSlowing Past the Goalie”, the NTM outlook for real PCE growth in the U.S. is as dour as it has been at any point in time since late-2007.
If the domestic consumption growth finally folds like manufacturing, exports, capex and corporate profits all have before it, a global recession in 2016 is not at all out of the realm of possibly given the current state of international economic affairs.
Source: Bloomberg L.P.
Given the recent strength in domestic auto sales, it may be worth adding General Motors (GM) to your “FANG” screen. A quantitative breakdown in those stocks would likely be a harbinger of that the proverbial “music” has officially stopped.
Have a great evening,