China GDP: undershooting the target?

China’s Q1:14 GDP numbers will be released overnight/early tomorrow morning. Analysts expect a slowdown to 7.3% y/y growth from 7.7% y/y in Q4:13. Markets have been concerned over the possibility of a hard landing, particularly amid signs of growing credit market stress in China. Some of these fears were allayed after the government put its growth target for the year at 7.5% y/y and, more recently, announced a supposed “mini stimulus”. In terms of the distribution of annual forecasts, it’s pretty even, with 19 of the 63 analysts seeing a lower-than-consensus figure and 20 anticipating strong data. Usually, we don’t experience too much of a surprise on the GDP data and we dare say that the market is biased towards expecting softer-than-expected GDP data even if analysts have not, given that monthly data has tended to underwhelm during the quarter. As we highlighted yesterday, caution should be exercised when interpreting the possible consequences of growth disappointment in China for SA’s currency and interest rate markets. More specifically, we think that the domestic interest rate market impacts needn’t mimic those associated with Fed policy normalisation. Both disappointing growth in China and the Fed’s policy normalisation are rand negative. A more dramatic slump in China would do further harm to an already weak domestic growth outlook via the export channel. But falling global commodity prices would be disinflationary. It is not clear at all that the SARB would hike rates under these circumstances, or that it would be averse to the rand assuming its “shock-absorber” function into a negative terms of trade shock.

China’s credit data, out early this morning, appears consistent with the PBoC’s efforts at clamping down on excessive credit expansion. While bank loans increased by a hefty RMB1,050 billion in March, more than the RMB1,000 billion anticipated (Bloomberg consensus) and well ahead of the increase of RMB644.5 million registered in February, this is in line with usual seasonal trends. Lending is usually ramped up in March ahead of quarterly financial reports. Total social aggregate financing, the broadest measure of liquidity in the economy, dropped to RMB2,070 billion from RMB2,550 billion. However, an even larger fall than this 19% y/y drop was predicted – analysts had expected that the measure would fall to RMB1,850 billion. Growth in outstanding bank loans slowed to 13.4% y/y in March – the slowest pace since 2005 – from 13.7% in February. M2 growth slipped to 12.1% y/y in March from 13.3% in February, well below expectations for 13.0% y/y growth. Uncertainty surrounding the extent to which tightening credit conditions might negatively impact China’s growth prospects has many market participants particularly sensitive to money supply and credit numbers.

In the US, Fed Chair Yellen gives opening remarks to the Atlanta Fed’s financial markets conference today. It’s via video link and will only last around 15 minutes; and there is no set title to her comments. With this in mind, our G10 FIC strategist Steve Barrow is sceptical that there will be much here to move the markets. Yellen gives another speech later in the week to the Economic Club of New York, and it might be this one that holds more interest for the market.

US retail sales, released yesterday, outperformed expectations, rising 1.1% y/y in March (Bloomberg consensus: 0.9% y/y). The large increase was largely attributed to an unwinding of weather-related weakness seen since December. We feel this underscores the potential for any weather-related unwind in future and other economic activity indicators to surprise markets. This could force market participants to form a more hawkish assessment of the Fed’s intended policy normalization path, and consequently be to the detriment of risky assets. Today, US consumer inflation figures will be published. We still maintain that the greater risk with respect to data surprises that could potentially alter the Fed’s policy normalisation path sits in inflation indicators/drivers. US CPI data is widely expected to show a modest 0.1% monthly rise in March at both the headline and core level. We think the same. The skew on analysts’ forecasts lies to the higher side. In the survey of core CPI expectations, for example, just over 70% of the 78 surveyed by Bloomberg see a 0.1% rise and just under 30% expect 0.2%. The headline CPI estimate is also skewed slightly to the high side. This would seem to suggest that, if the 0.1% consensus figures are wrong, it is more likely to be because of bigger increases, possibly to the detriment of treasuries. But the impact is likely to be limited as long as the miss is no more than one tenth.

The rand weakened for the third consecutive day against the dollar yesterday, closing at USDZAR10.51 compared with Friday’s close of USDZAR10.49. This occurred into the dollar strength against all of the major crosses, a mixed performance from commodity currencies, and a mixed to weaker performance from EM currencies we track for purposes of this report. The dollar strengthened against the euro, the pound and the yen, with the biggest move seen against the euro (-0.5%). The rand weakened against the dollar and the pound, while strengthening against the euro and the yen. The rand was the second-worst-performing commodity currency (beating only the NOK) and was the fourth-worst-performing EM currency (beating only the TRY, the HUF and the RUB). The rand traded between a low of USDZAR10.4601 and a high of USDZAR10.5733. Support from where the rand opened this morning sits at 10.4800, 10.3500 and 10.2500. Resistance levels sit at 10.5600, 10.6800 and 10.7400.

Turning to commodity prices, Brent, gold and platinum rose by 1.6%, 0.7% and 0.6% respectively. Copper meanwhile edged lower by 0.04%. The ALSI rose by 0.3%, while the EM MSCI fell by 0.4%.The EMBI spread widened by 3 bps and the SA’s five-year CDS spread widened by 4 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 5.4%.

Non-residents were net buyers of local equities (ZAR387 million) and were mild net buyers of local bonds (ZAR61 million) on the day. Buying of bonds was seen in the 3-7 (ZAR595 million) year bucket. Selling of bonds was meanwhile seen in the 7-12 (-ZAR258 million), 12+ (-ZAR253 million) and 1-3 (-ZAR23 million) year segments. Bond yields rose by between 4 bps (R203) and 8 bps (R214) into a bear curve steepening. The 3x6 FRA rose by 2 bps, and the 6x9 and 12x15 FRAs both rose by 3 bps.

Turning to local labour news, Standard Bank Research estimates that approximately 670,000 ounces of PGM output had been lost by the end of March due to the strikes. Platinum accounts for around 400,000 ounces of the total, palladium accounts for around 225,000 ounces and rhodium for around 54,000 ounces. SBR’s commodities strategist Walter de Wet nevertheless does not expect platinum prices to rise materially for 2014, because of high levels of above-ground inventories. “Our analysis of above-ground platinum and palladium inventory indicates that this inventory is indeed high. As a result, on balance, the bias may lie towards having to wait longer before PGM prices move higher on a sustainable basis”, he says. According to EWN, NUM is anxious with regard to the downsizing in the SA mining industry as various sectors press ahead with automation programmes. Frans Baleni, NUM general secretary, said “Around 16,000 jobs have been lost. It’s quite clear that the employers have made the commitment that they will further lay off some of the workers.”

Latest SA publications

Fixed Income Weekly: Offshore investors return to SA equities by Asher Lipson and Kuvasha Naidoo (11 April 2014)

Credit & Securitisation Weekly: Robust demand for corporate paper by Robyn MacLennan and Steffen Kriel (11 April 2014)

FX Weekly: The SARB & the rand: the new abnormal by Bruce Donald, Marc Ground and Varushka Singh (4 April 2014)

FX Flash Note: MPC meeting: “What is normal?” by Bruce Donald, Marc Ground and Varushka Singh (28 March 2014)