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China: A Made-Up Data Dump From Everyone's Favorite Communist Country

China: A Made-Up Data Dump From Everyone's Favorite Communist Country - China cartoon 01.07.2016

 

The week concludes with a made-up data dump out of everyone’s favorite communist economy. Chinese GDP growth allegedly ticked down -10bps to 6.7% YoY in Q1 and the quarter allegedly ended on a positive note with Retail Sales, Industrial Production, Fixed Assets Investment, Money Supply and Total Social Financing growth all accelerating sequentially in March. Here's a brief summary:

 

  • March industrial production in China was +6.8%, which was better than consensus and a sequential increase from February.
  • March retail sales were also better than expected at +10.7% year-over-year.
  • The truly blow out number was on government spending. For the month, fiscal spending was up 20.1% year-over-year!

 

While we’ve been right on our call for both the Chinese economy and Chinese yuan to avoid falling off a cliff over the intermediate-to-long term, a lot of the reprieve in Chinese capital outflows and slowing growth on the mainland has been perpetuated by a reversal of the trend of depreciation in the PBoC’s yuan fixing.

 

But now that the U.S. dollar appears to making a series of higher-lows vs. peer currencies, we expect a meaningful increase in pressure on the CNY and CNH from here. That should propagate another bout of global deflation fears over the next 3-6 months.

 

Stay tuned!


INSTANT INSIGHT | Oil Prices, US Dollar & Credit Risk

Takeaway: While oil prices bounce back and forth on oil production "freeze" talks, we think the dollar will strengthen pushing Oil prices lower.

INSTANT INSIGHT | Oil Prices, US Dollar & Credit Risk - Oil cartoon 11.20.2015

 

Since the February lows, oil has rallied massively. Why? Look at the U.S. dollar. The CRB index of commodities has a 30-day inverse correlation of -0.88 vs. the US Dollar.

 

So where do we go from here?

 

Our Macro team elaborates on this point in a note sent to subscribers earlier this morning:

 

"Whether it’s output cut rumors into this weekend’s meeting or declining U.S. production, the “bottom is in” headlines are at the top of commodities feeds from every major news source with WTI +40% in the last 3 months.

 

However, looking at contract positioning shorts, a crowded consensus short positioning has been washed out (crude, nat. gas, gold, silver positioning all registering z-scores >1x on a TTM basis) with money betting on a continued decline in the U.S. dollar.

 

A supply side floor argument is a fundamental story, but not a catalyst, and we would reiterate that the credit risk priced into commodity leveraged fixed income is considered all but gone in market-price terms."

 

In other words, look for dollar strength pushing crude prices lower.

 

While we're at it, a quick note on commodity-leveraged credit risk...

 

On The Macro Show this morning, Hedgeye Senior Macro analyst Darius Dale points out that U.S. high-yield bond issuance is down -53% year-over-year in 2016.

 

Yikes! Certainly not a vote of confidence.

 

Meanwhile, as Hedgeye Macro analyst Ben Ryan pointed out in "The Unintended Consequences Of ZIRP On Commodities" earlier this year:

 

"Using a sample of 34 different producers in 4 different sub-sectors, commodity producer debt as a % of corporate credit outstanding has multiplied ~2.5x in 10 years. This group’s aggregate debt level is up ~5x in 10 years. The chart below shows the jump in commodity producer debt as a share of aggregate corporate debt levels." 

 

INSTANT INSIGHT | Oil Prices, US Dollar & Credit Risk - commod leverage large

 

The critical question to ask yourself... How much longer can it last?


CHART OF THE DAY: A Look At China's Slowest Growth Rate In 7 Years

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.

 

"... The notable “positive” economic news that came out overnight was that Chinese growth was inline at +6.7% year-over-year. This is a sequential slowdown from the 4th quarter of 2015, which grew at +6.8% y-o-y. And as we show in the Chart of the Day, this continues the ongoing trend of slowing growth in China and is the slowest quarterly growth rate in seven years."

 

CHART OF THE DAY: A Look At China's Slowest Growth Rate In 7 Years - 4 15 16 EL ben


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Cartoon of the Day: Look Out Below!

Cartoon of the Day: Look Out Below! - recession cartoon 04.14.2016

 

"Unlike many strategists (who missed calling the cycle top in US Consumption, Employment, and Profits last year), we have stayed with The Cycle call we’ve had all along here in Q2," Hedgeye CEO Keith McCullough wrote recently.


INSTANT INSIGHT | Dissecting The Nikkei Pop, Yen Weakness & BOJ Warning Shot

 

INSTANT INSIGHT | Dissecting The Nikkei Pop, Yen Weakness & BOJ Warning Shot - kuroda 2

 

"I really don’t think that the introduction of the negative interest rate backfired or caused the yen to appreciate and stock markets to decline in Japan... If anything, I can say that if we didn’t introduce the QQE with the negative interest rate, financial markets in Japan would have been even worse.”

 

That's BOJ head Haruhiko Kuroda, during a speech at Columbia University yesterday. Kuroda continued reiterating that the BOJ "will not hesitate to take additional easing measures in terms of three dimensions — quantity, quality and the interest rate — if it is judged necessary."

 

Reality check!

 

Here's analysis from our Macro team in a note sent to subscribers this morning:

 

"The Japanese yen’s -1% decline to the mid-109’s on the USD cross in the WTD has been good for a major squeeze higher in the Nikkei this week. Today’s massive +3.2% rally puts the index up +6.9% WTD with one more day of trading to go.

 

In a speech at Colombia University yesterday, BoJ Governor Haruhiko Kuroda doubled down on NIRP by highlighting how it “boosts the effects of existing policy measures by directly pushing down the short-end of the yield curve”. Despite this week’s spectacular gains, the Nikkei more-or-less remains in crash mode down -19.3% from its peak last June and we think it’ll take more than jawboning to perpetuate a series of lower-highs in the yen and higher-lows in the Nikkei from here.

 

INSTANT INSIGHT | Dissecting The Nikkei Pop, Yen Weakness & BOJ Warning Shot - nikkei chart

 

We expect the pressure of decelerating trends across headline, core and producer price inflation – as well as long-term breakeven rates – to cause the BoJ to add to its easing measures at its April 27-28 meeting. Will additional easing in Japan be met with additional repudiation of the central planning #BeliefSystem, or will Japan simply export this growing lack of faith to U.S. markets via a stronger dollar?"


The Clinton Firewall, Bernie Retreats To The Vatican & Trump Pulls Ahead In NY

Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

ALL VOTES LEAD TO ROME?:

 

The Clinton Firewall, Bernie Retreats To The Vatican & Trump Pulls Ahead In NY - hillary pic

 

NY is Hillary Clinton's Northeastern firewall, but like many of her other firewalls, the Bern found a way to jump it - and enthusiasm for him was more than validated by last night's crowd of 27,000 in NYC. Sanders had started to gain momentum, and was trending up in the polls - but Clinton has pulled out all of the stops, and his momentum statewide stalled. The surest sign of a Sanders loss is that he is following through with his scheduled trip to the Vatican after participating in tonight's Brooklyn debate. If he thought he was anywhere close to pulling off an upset victory he would be spending those two days in Rome, NY instead.   

ANTI-TRUMP LAPSE:

 

The Clinton Firewall, Bernie Retreats To The Vatican & Trump Pulls Ahead In NY - ted cruz hold

 

Following a big win for the anti-Trump movement in WI, their efforts heading into NY have lost as much steam as Cruz's campaign. Perhaps knowing a defeat was inevitable, the anti-Trump aligned PACs haven't spent any money on ads in NY. Whether it's a calculated decision or not, it may be a mistake - even slight resistance and microtargeting (a Cruz mainstay) in select Congressional districts could substantially decrease how many delegates Trump wins in NY, and at this point a mere 20 extra delegates could be the make or break for a first ballot Trump victory.

KEEPING AT ARM'S LENGTH:

 

With preparations and plotting for the Republican convention in full effect, prominent Republicans across the party are declaring they will not attend as a number of them are facing competitive races this fall. NH Senator Kelly Ayotte and NC Senator Richard Burr have suggested they will skip the event - keeping out of the unpredictable spotlight or being tied to Donald Trump or Ted Cruz - reaffirming what a number of our political sources having been telling us for weeks: Republican incumbents are running intensely localized campaigns that more resemble those vying to be sheriff than Washington power brokers.


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