Weekly Economic and Financial Commentary

China Slowed Further in Q1

Mon, Mar 16 2009, 06:10 GMT
by Wachovia Research Team - Wells Fargo Investments, LLC | View company's profile

Vote:

Vote up:0
Vote down:0

U.S. Review

Is This the End of the Beginning?

This week’s report that retail sales fell much less than the consensus estimate in February and the upward revision to the January sales figures raises the prospect that the worst of this recession may actually be behind us. While such a statement might seem surprising, it is generally consistent with our forecast, which has long noted that late 2008 and early 2009 would mark the darkest hours of this recession. Even if the worst is behind us, the economy still faces a long and arduous road to recovery.

To paraphrase Winston Churchill, this week’s improved retail sales figures, sharp decline in inventories, and positive bounce to the stock market do not likely mark the end of the recession, nor do they mark the beginning of the end. Perhaps, however, the apparent bottoming in retail sales combined with the sharp reduction in business inventories will mark the end of the beginning of this downturn.

January’s sharp upward revision to retail sales lifted the overall increase to 1.8 percent. This marks the first increase in overall retail sales in seven months and the largest increase since January 2006.

The Darkest Hours of This Recession May Soon be Behind Us

Retail sales fell 0.1 percent in February but even that result was better than expected. The overall sales figures are being distorted by swings in gasoline prices and seasonal distortions. Gasoline prices tumbled late last year and then bounced back in January and February. Higher gasoline prices sent sales at gasoline stations sharply higher, with sales up 2.8 percent and 3.4 percent in January and February, respectively.

Seasonal distortions may also make the recent retail sales figures look a little stronger than they truly are. Motor vehicle sales bounced back in January following several months where sales were severely constrained. Sales at department stores and specialty chains also bounced back during the past two months even though nearly every major retailer continues to report sales are under intense pressure. How do we reconcile this discrepancy?

The split between the Department of Commerce’s numbers and the chain store sales figures has a great deal to do with how the government and retailers look at sales. The government figures are reported on a month-to-month basis and adjusted for seasonal factors. Normally, sales plunge in January and February, coming down from the holiday season. This past year sales plummeted all throughout the fall, as the widening financial crisis kept shoppers in a dour mood. Since sales fell so sharply during the holiday season, they did not fall as much as they normally do in January and February. As a result, the seasonally adjusted figures showed an increase. Retailers tend to look at sales on a year-to-year basis and on this basis sales are down by both measures.

Even though the recent trend in retail sales has been distorted by swings in gasoline prices and seasonal factors, the increased figures still reflect some improvement. Retailers, wholesalers and manufacturers are slashing their inventories, which will eventually set the stage for a revival in orders and production. Business inventories fell 1.1 percent in February, following a revised 1.6 percent drop in January. Inventories will likely subtract around $100 billion from real GDP during the first quarter, which is one of the main reasons we have such a large drop in real GDP projected for the first quarter. After the first quarter’s big drop, however, declines in real GDP should be progressively less severe.

First-time claims for unemployment insurance and continuing claims both rose in the latest week. The four–week moving average through March 7 totals 650,000, up from 608,000 a month earlier. Given the jump, nonfarm payrolls should post another sharp decline for the month of March.

Global Review

China Slowed Further in Q1

China released a slew of economic data this week that gave investors a sense of where the Chinese economy is at present. The bad news is that growth in industrial production appears to have slowed further in the first quarter. The timing of Chinese New Year complicates the interpretation of IP data in the first two months of the year. Industrial production in January, when Chinese New Year occurred this year, dropped 3.4 percent relative to the same month in 2008. In February, IP growth rebounded to 11.0 percent (New Year in 2008 fell in February). Taking the two months together, IP was up only 3.8 percent, down from the 6.4 percent rate that was registered in the fourth quarter.

The continued slowdown in Chinese IP growth reflects, at least in part, economic weakness in the rest of the world. The value of Chinese exports in the first two months of 2009 was down about 22 percent relative to the same two-month period last year. As shown in the top chart, the Chinese trade surplus, which had been running north of $35 billion per month, tumbled to less than $5 billion in February. Although Chinese New Year undoubtedly overstates the “true” decline, we believe that China’s trade surplus will gradually narrow this year as most other countries remain in recession.

The domestic side of the economy is showing a bit more resilience. Growth in retail spending in the first two months of the year declined to 15.2 percent. However, some of the deceleration in the value of retail spending may reflect the decline in prices over the past few months. CPI inflation averaged 2.5 percent in the fourth quarter of 2008. In February, consumer prices fell 1.6 percent relative to the same month last year. Therefore, growth in real retail spending probably is holding up better than nominal spending. Another source of strength is fixed asset investment, which in the first two months of the year was up 26.5 percent, up modestly from the 26.1 percent growth rate that was registered in December. It appears that the government’s intention to accelerate infrastructure spending is starting to bear some fruit.

In sum, the year-over-year GDP growth rate, which was 6.8 percent in the fourth quarter of 2008, probably slowed to four or five percent in the first quarter of this year (see bottom chart). However, the economy may be in the process of bottoming. The fiscal stimulus package that the government announced last fall is in the pipeline, and it should slowly lift the year-over-year growth rate as the year progresses. Another sign of stabilization can be seen in the stock market. The Shanghai composite index is up about 17 percent this year. Stock markets in most other major countries are off ten to twenty percent on balance. Perhaps investors are signaling that growth will return to China sooner than in most other economies.

The value of the Chinese renminbi has been essentially unchanged versus the dollar since last summer. As long as the global economic outlook remains clouded—we think it will for the next few quarters—the Chinese government will likely maintain the sideways trend in the yuan/dollar exchange rate.

Download Full Weekly Economic and Financial Commentary

Published On Mon, Mar 16 2009, 06:17 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

More Reports from this Contributor

Archive

The Moderate Economic Recovery is Still Underway
Fri, Feb 10 2012, 19:23 GMT
Off to a Good Start for the Year in US; Europe Agrees on Fiscal Pact; Manufacturing Improves
Fri, Feb 3 2012, 20:08 GMT
Less Strength Than Meets The Eye
Mon, Jan 30 2012, 05:24 GMT
Good News on Manufacturing, Inflation and Housing
Fri, Jan 20 2012, 20:12 GMT
Week Two Brings a Little Less Enthusiasm
Mon, Jan 16 2012, 06:17 GMT

Older Posts:

Advertisement

Legal disclaimer and risk disclosure

Recently, the stock market has experienced high levels of volatility. If you are thinking about participating in fast moving markets, please take the time to read the information below. Wells Fargo Investments, LLC will not be restricting trading on fast moving securities, but you should understand that there can be significant additional risks to trading in a fast market. We've tried to outline the issues so you can better understand the potential risks. If you're unsure about the risks of a fast market and how they may affect a particular trade you've considering, you may want to place your trade through a phone agent at 1-800-TRADERS. The agent can explain the difference between market and limit orders and answer any questions you may have about trading in volatile markets. Higher Margin Maintenance Requirements on Volatile Issues The wide swings in intra-day trading have also necessitated higher margin maintenance requirements for certain stocks, specifically Internet, e-commerce and high-tech issues. Due to their high volatility, some of these stocks will have an initial and a maintenance requirement of up to 70%. Stocks are added to this list daily based on market conditions. Please call 1-800-TRADERS to check whether a particular stock has a higher margin maintenance requirement. Please note: this higher margin requirement applies to both new purchases and current holdings. A change in the margin requirement for a current holding may result in a margin maintenance call on your account. Fast Markets A fast market is characterized by heavy trading and highly volatile prices. These markets are often the result of an imbalance of trade orders, for example: all "buys" and no "sells." Many kinds of events can trigger a fast market, for example a highly anticipated Initial Public Offering (IPO), an important company news announcement or an analyst recommendation. Remember, fast market conditions can affect your trades regardless of whether they are placed with an agent, over the internet or on a touch tone telephone system. In Fast Markets service response and account access times may vary due to market conditions, systems performance, and other factors. Potential Risks in a Fast Market "Real-time" Price Quotes May Not be Accurate Prices and trades move so quickly in a fast market that there can be significant price differences between the quotes you receive one moment and the next. Even "real-time quotes" can be far behind what is currently happening in the market. The size of a quote, meaning the number of shares available at a particular price, may change just as quickly. A real-time quote for a fast moving stock may be more indicative of what has already occurred in the market rather than the price you will receive. Your Execution Price and Orders Ahead In a fast market, orders are submitted to market makers and specialists at such a rapid pace, that a backlog builds up which can create significant delays. Market makers may execute orders manually or reduce size guarantees during periods of volatility. When you place a market order, your order is executed on a first-come first-serve basis. This means if there are orders ahead of yours, those orders will be executed first. The execution of orders ahead of yours can significantly affect your execution price. Your submitted market order cannot be changed or cancelled once the stock begins trading. Initial Public Offerings may be Volatile IPOs for some internet, e-commerce and high tech issues may be particularly volatile as they begin to trade in the secondary market. Customers should be aware that market orders for these new public companies are executed at the current market price, not the initial offering price. Market orders are executed fully and promptly, without regard to price and in a fast market this may result in an execution significantly different from the current price quoted for that security. Using a limit order can limit your risk of receiving an unexpected execution price. Large Orders in Fast Markets Large orders are often filled in smaller blocks. An order for 10,000 shares will sometimes be executed in two blocks of 5,000 shares each. In a fast market, when you place an order for 10,000 shares and the real-time market quote indicates there are 15,000 shares at 5, you would expect your order to execute at 5. In a fast market, with a backlog of orders, a real-time quote may not reflect the state of the market at the time your order is received by the market maker or specialist. Once the order is received, it is executed at the best prices available, depending on how many shares are offered at each price. Volatile markets may cause the market maker to reduce the size of guarantees. This could result in your large order being filled in unexpected smaller blocks and at significantly different prices. For example: an order for 10,000 shares could be filled as 2,500 shares at 5 and 7,500 shares at 10, even though you received a real-time quote indicating that 15,000 shares were available at 5. In this example, the market moved significantly from the time the "real-time" market quote was received and when the order was submitted. Online Trading and Duplicate Orders Because fast markets can cause significant delays in the execution of a trade, you may be tempted to cancel and resubmit your order. Please consider these delays before canceling or changing your market order, and then resubmitting it. There is a chance that your order may have already been executed, but due to delays at the exchange, not yet reported. When you cancel or change and then resubmit a market order in a fast market, you run the risk of having duplicate orders executed. Limit Orders Can Limit Risk A limit order establishes a "buy price" at the maximum you're willing to pay, or a "sell price" at the lowest you are willing to receive. Placing limit orders instead of market orders can reduce your risk of receiving an unexpected execution price. A limit order does not guarantee your order will be executed -" however, it does guarantee you will not pay a higher price than you expected. Telephone and Online Access During Volatile Markets During times of high market volatility, customers may experience delays with the Wells Fargo Online Brokerage web site or longer wait times when calling 1-800-TRADERS. It is possible that losses may be suffered due to difficulty in accessing accounts due to high internet traffic or extended wait times to speak to a telephone agent. Freeriding is Prohibited Freeriding is when you buy a security low and sell it high, during the same trading day, but use the proceeds of its sale to pay for the original purchase of the security. There is no prohibition against day trading, however you must avoid freeriding. To avoid freeriding, the funds for the original purchase of the security must come from a source other than the sale of the security. Freeriding violates Regulation T of the Federal Reserve Board concerning the extension of credit by the broker-dealer (Wells Fargo Investments, LLC) to its customers. The penalty requires that the customer's account be frozen for 90 days. Stop and Stop Limit Orders A stop is an order that becomes a market order once the security has traded through the stop price chosen. You are guaranteed to get an execution. For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to investing or types of securities and investments you might buy or sell, Wells Fargo and its affiliates are not providing investment recommendations, advice, or endorsements. Data have been obtained from what are considered to be reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Wells Fargo makes no warranties and bears no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.