A slew of March China data
A slew of March China numbers will be the data highlight for markets this week.
Greece managed to make a €450 million payment to the IMF last week. But it’s almost out of money and has obligations to meet in coming seeks. The Eurogroup, which is composed of the finance ministers in the euro area, meets April 24. Greece hopes to secure at or before this meeting an advance an interim disbursement. This is like a down payment on funds not due from its creditors till next summer under the current bailout programs. Negotiations are moving slowly because Greece has not met the conditions for that disbursement. We again see a rising risk that Greece will end up defaulting and abandoning the euro but don’t expect that to happen in the next three months.
Prices and policy
With energy prices stabilizing, month-on-month headline inflation rates are picking back up. Year-on-year rates continue low, however, given that year-ago energy prices were considerably higher.
Core inflation rates have slowed down less than what one might expect given the drop in commodities prices. While core price indices exclude commodities, dramatic swings in commodity prices do eventually pass through to core indices, especially when demand is weak as it has been these past three months. Two factors could explain this. One is that global supply has been so slow, pushing up capacity utilization rates. The other is that in large importer countries whose currencies have weakened sharply against the dollar, currency depreciation may be passing through to core price indices.
The Bank of Japan last week held to its extraordinarily loose policy stance, which involves purchasing assets (conducting quantitative easing) such that “monetary base will increase at an annual pace of about 80 trillion yen”, and a monetary policy rate of just 0.05%. Japan is not on track to meet its inflation target of 2.0% by March 2016 as intended. In fact, it’s likely to drop to around zero this quarter, as the base effect from the year-ago consumer valued added tax hike disappears. Hence, we expect the BoJ to further ease its stance (expand its asset purchase program) sometime in the next six months.
Although Chinese authorities, to rebalance China’s economy away from exports and investment (saving) toward domestic consumption, are comfortable with and are planning around a gradual slowdown in growth rates, they of course don’t want a recession. So the People’s Bank of China (PBoC) is attenuating the slowing trend by loosening its stance. In recent weeks, three times it cut the reverse repo rate, steering the 7-day repo rate down to 3% from 4.8%. JPMorgan is making an argument we find persuasive that the PBoC will next repeat its February 2015 cut in the reserve ratio requirement (RRR). They expect two cuts this quarter, one in April and the other in June. Last week’s headline 12-month inflation number of 1.4% (unchanged from February) leaves the PBoC with ample room for maneuver.
Final Purchasing Manager Indices (PMIs) released last week showed output and sentiment on a solid improvement trend, further boosting our high confidence that the European Central Bank (ECB) will stay the course with quantitative easing through the purchase of both private and public securities throughout 2015 and 2015.
Reserve Bank of India (RBI) stayed on hold last week and said its forward actions would be data dependent. Apparently the Bank will not be constrained by the potential for currency weakening from expected near-term Fed tightening; it “anticipates India is better buffered against likely volatility than in the past.” Headline inflation is just over 5.00% and core inflation just over 4.00%. The target until January 2016 is 6.00% (afterwards it drops to 4.00%). Given India’s below-target current headline and core inflation rates and the RBI sense of being buffered from volatility induced by Fed normalization, we expect the RBI to cut rates sometime this quarter. Monday’s inflation report will give us more insight.
March annual inflation for Mexico came in last week at 3.1%, a wonderful number for Banxico (it targets 3.0%). Core inflation was just 2.45%. These numbers and Banxico minutes reinforced our view that the central bank will not preempt the Fed. The Bank, like us, sees external and domestic demand weak, a fact that to some members of the Board of Governors helps explain the weak pass-through so far to Mexico inflation from peso weakening against the dollar. Some analysts reacted to the minutes by revising down their forecast for the Banxico rate in 2015. Analysts are all over the map in their outlook for policy rates next year. Their divergence stems from divergence in their outlook for the Fed. We hold to our view that by end 2016 the Fed will be at only 1.25% and Banxico 4.25% by December 2016.
With oil prices expected to remain low, monetary tightening will have to happen concurrently with fiscal tightening. The Mexican treasury has announced additional spending cuts for 2016 amounting to 0.7% of GDP.
In the first quarter of 2015, although euro area activity far outpaced expectations, because the USA slowed down and China grew much more slowly than expected, global growth rates took a dip. We see this growth dip as a blip and anticipate acceleration in both China and the USA to begin this quarter with respect to January–March.
Note that this talk about a quarter-on-quarter pickup in China growth is no retraction of our view that China’s growth will continue to slow down on trend for next 3–5 years.
A slew of China data is due in this coming week, but of course it is quarter 1 data, meaning that even if it comes in weak it will not refute our view that growth will pick up in quarter 2.
Germany’s industrial output index for February and its downward revision for January disappointed markets and us last week, but did not alter our perception that Germany is on a solid growth trend. Italy’s is due out Monday and should show expansion. Other national indices published last week point to a quickening rate of expansion overall for the region to show up in next week’s euro area industrial production index release. Its January number will probably be revised down a bit, however, given last week’s downward revision for Germany’s.
Trade has for years been Mexico’s most dynamic sector, so it’s a sad thing for Mexico that global trade has been so weak. Although we expect a pickup in China and euro trade data for March, we perceive global trade flows to have remained weak. Quarter 2 trade should be stronger, as the fall in global energy prices sparks a jump in consumer demand.
Given weak Q1 global and Mexico data, last week, we revised down our GDP forecast for Mexico for 2015 to 3.1%. This lowered the base for our 2016 growth rate, causing our forecast for 2016 to move up. But after incorporating the newly announced fiscal cuts into our outlook, we ended up right back where we started: 3.8% in 2016. Risks to that forecast, however, are tilted to the downside. Mexico’s treasury has revised its outlook for the Mexico oil basket price to $50/barrel from its previous forecast of $79/barrel. But our forecast for Brent is $50/barrel, which corresponds to about $40 for the Mexico Mix. If we don’t revise up oil soon, we’ll have to forecast even further fiscal cuts in Mexico in 2016 and revise down our 2016 growth number for Mexico.
Industrial production in Mexico accelerated to 4%. Private non-infrastructure construction (commercial and housing) continued to expand.
Calendar for the week ahead
Events in red are those most likely to shake markets.
Sometime in April
- China: Monetary policy decision (Mar). We find persuasive JPMorgan’s argument that the PBoC’s next easing move will be to cut its reserve ratio requirement (RRR), probably in April.
During the week
- Japan: Cabinet office private consumption index (Mar). Weather was terrible in February, so this number will likely be weak. Looking forward, we expect consumer demand to strengthen this quarter to rise, on falling energy prices. This view is supported by an uptick in business sentiment, especially with regard to the consumer sector. Core machine orders. This choppy index will likely maintain its upward trend. Money stock (M3) (Mar). It has been expanding steadily at 2.8-2.9%. It will need to speed up for deflation to be defeated.
- Euro area: Industrial production (Feb). Despite a disappointing German number last week, based on other national numbers and survey data, we expect industrial output for the euro area overall to have accelerated in February, but for the January number to undergo a small downward revision (because Germany’s did).
- Italy: Industrial production (Feb). Last week’s Purchasing Managers Index (PMI) release pointed to strengthening output.
- Mexico: IMSS (formal) jobs creation (Mar).
- India: Industrial production (Feb). Consumer price inflation (Mar). We expect India to cut rates this quarter despite Fed plans to normalize. We’ll have a clearer view as to when after seeing this report. Headline inflation has been just over 5.00% lately, whereas the RBI target (till next January) is 6.00%.
- Euro area: Industrial production (Feb). Last week’s Purchasing Managers Indices (PMIs) for the euro area pointed to strengthening output.
- USA: Retail sales (Mar).
- China: GDP (Q1 2015). Seasonally adjusted growth rates for the three quarters prior to quarter 1 were 7.4%, 8.3%, and 7.2%. JPMorgan estimates 5.3% for quarter 1 2015, which for China would be a snail pace. Anything under 6.0% would be negative for commodities, U.S. inflation and rate expectations, and the U.S. dollar. The net impact on the Mexican peso from a dip in oil prices but also a downward rate revision is unforeseeable. Note that Chinese equity seems to be on a path divorced from growth and growth outlooks, charging upward while growth is slowing and is seen slowing down on trend for years to come. Fixed investment (Mar). The consensus has fixed investment growth rates sliding from the January–February average of 13.9% year on year but only to the 13.0-13.5% range. Is this good news or bad. It’s hard to say. On the one hand, it speaks of resilience in at least one sector of the demand. But on the other hand it reminds us that China’s (over-)building boom continues despite slowing a slowing economy, as the whole world, like a Greek chorus, stands by watching and chanting visions of doom.
- Euro area: International trade (Feb). Fortunately, we expect trade flows to show some strengthening. Unfortunately, we think not enough for us to stop calling them weak.
- Germany: Consumer price index, final (Mar).
- USA: Housing starts (Mar).
- China: Fixed investment (Mar). The consensus has fixed investment growth rates sliding from the January–February average of 13.9% year on year but only to the 13.0-13.5% range. Is this good news or bad. It’s hard to say. On the one hand, it speaks of resilience in at least one sector of the demand. But on the other hand it reminds us that China’s (over-)building boom continues despite slowing a slowing economy, as the whole world, like a Greek chorus, stands by watching and chanting visions of doom.
- Euro area: Consumer price index, final (Mar).
- UK: Labor market report (Mar).
- USA: U. of Michigan consumer sentiment, preliminary (Apr), Consumer prices (Mar).
- Euro area/Greece: Eurogroup meets. Greece and markets hope that an interim disbursement will be approved.