China data generally above forecast, but a few greasy spots on the road?


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jun. CPI out at +0.7% m/m vs. , ex-food/energy +0.2% vs. +0.6%/+0.1% expected respectively

  • US Jul. Empire Manufacturing out at -0.55 vs. -5.0 expected and -9.41 last

  • US Jun. Industrial production out at -0.4% m/m vs. -0.6% expected and revised -1.2% prior

  • US Jun. Capacity Utilization out at 68.0% vs. 67.9% expected and revised 68.2% prior

  • NZ Jun. Business PMI out at 46.2 vs. revised 43.1 prior

  • NZ Q2 CPI out at +0.6% q/q, +1.9% y/y vs. +0.5%/1.8% expected and 0.3%/3.0% prior resp.

  • JP May Tertiary Industry Index out at -0.1% m/m vs. +0.4% expected and +2.2% prior

  • CN Q2 GDP out at +7.9% y/y vs. +7.8% expected and +6.1% prior

  • CN Jun. PPI out at -7.8% y/y vs. -7.4% expected and -7.2% prior

  • CN Jun. CPI out at -1.7% y/y vs. -1.3% expected and -1.4% prior

  • CN Jun. Retail Sales out at +15.0% y/y vs. +15.3% expected and +15.2% prior

  • CN Jun Industrial Production out at +10.7% y/y vs. +9.5% expected and +8.9% prior

  • CN Jun. Fixed Asset Investment out at +33.6% y/y vs. +34.0% expected and 32.9% prior


THEMES TO WATCH – UPCOMING SESSION

  • Swiss ZEW Expectations Survey (0900)

  • EU ECB’s Tumpel-Gugerell speaks (1200)

  • US Initial Jobless Claims (1230)

  • US TIC Flows (1300)

  • US Treasury’s Allison testifies (1330

  • US Philadelphia Fed Index (1400)

  • US Former US Tres Sec Paulson testifies (1400)

  • US NAHB Index (1700)

  • US Fed’s Duke testifies (1800)

Market Comments:

Markets headed towards the risk appetite stratosphere yesterday as the US Q2 earnings season continued to surprise to the upside. The positive sentiment was further bolstered by some above forecast data. US industrial production recorded a less-than-expected fall, at -0.4% vs. an expected -0.6%, while the empire manufacturing index rose to -0.55 vs. -5.0 expected and -9.4 previously. Minutes of the June 24 FOMC meeting saw growth forecasts for 2009 revised marginally upwards to -1.5 to -1.0 range from -2.0 to -1.3% previously but members still remained cautious about the future, with the “quite weak” economy still vulnerable to further shocks.
Nevertheless, Wall St powered higher and the break below the 200-day MA on the S&P now seems a long-distant marker! It may be worth noting however that yesterday’s S&P rally was accompanied by an uptick in the VIX index. A warning sign?

The only black spot could have been seen in the CPI numbers which showed a 0.7% increase (vs. 0.6% expected, powered mostly by a 17.4% increase in gasoline prices). Indeed, the better data and higher CPI put pressure on US bonds and the 10-year benchmark yield jumped 14bp to 3.61%. This provided USDJPY with enough ammunition to overcome the 94.0 handle.

So, we were all set for the next phase during the Asian session as China released its slew of economic numbers.
The Q2 GDP numbers were reported early in the Beijing Times and at +7.9% y/y were later confirmed by the official data. This was marginally above the market’s 7.8% forecast and a strong leap from Q1’s 6.1%. All the other data was broadly in line with forecasts but with mild discrepancies. On the positive side, industrial production was strong at +10.7%vs. +9.5% expected and +8.9% previously while PPI and CPI continued to indicate lower prices. On the other hand retail sales missed marginally at +15.0% y/y vs. +15.3% expected but perhaps more of a concern were the fixed asset investment numbers, which came in at +33.6% y/y vs. 34.0 expected and could have expected to be higher given the massive amount of bank lending that has been pouring into the economy recently. The comments from the Chinese authorities following the data indicated that China would stick to its proactive fiscal policy and moderately easy monetary stance. The National Bureau of Statistics reckoned there was growing evidence of more people out shopping and the pace of the recovery is intensifying. Yet on the other hand they also commented that the foundation for the recovery was still not solid.

Prior to the release, Asia was hesitant to build on the momentum from the US session and FX rates appeared to be hanging, though riskier currencies edged higher once the China GDP number was rumoured. After the data, there was a definite shift towards risk aversion in FX-land, with JPY crosses tumbling and the USD rising 0.3% on the index as stops were triggered on the downside. A definite case of buy the rumour/sell the fact trading. Asian bourses however remained supported but struggled to preserved gains of about 2% that were registered at the open.

The other market mover in Asia was the NZD which fell off a cliff after ratings agency Fitch affirmed its sovereign rating at AA+ but revised the outlook to negative. The revision in the outlook reflects the agency’s concern about the medium-term growth outlook given its persistently large current account deficit and rising foreign indebtedness. Fitch also reckons a stronger fiscal adjustment than planned, together with structural reforms, may be required to reduce the deficit.

We are marginally concerned that this blow out in risk appetite is sustainable given the external influences that appear to be building up. Attention will undoubtedly be fixed on the next Q2 earnings releases in the US, JP Morgan, Nokia and Google among the headliners, and there will be a desire for positives but we think today will be a time for caution and not get too carried away with sentiment either way.