The Monday Report

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By Greg Peel

The 24 trading hours of Friday were all about economic data, beginning in China.

The monthly “data dump” for March included the quarterly (year-on-year) GDP measure, which came in at 9.7% growth. This was a tick down from 9.8% in the December quarter but stronger than the 9.4% expected by the market. The result was similar for industrial production in March, which showed at tick down to 14.8% from 14.9% in February (year-on-year) but well exceeded the 14.0% expectation.

Economists had expected a big jump in the retail sales number given the February result of 11.6% was impacted by Chinese New Year, but the 17.4% score still topped the 16.5% expectation. Fixed asset investment ticked up to 25.0% from 24.9% but also beat the 24.8% estimate.

This batch of data offers some comfort to a global market concerned about a sharp Chinese slowdown. Growth numbers did not fall as much as expected, and the Chinese domestic economy, which is seen as the potential “saviour of the world” in terms of global economic growth and the restoration of global balance, is growing handsomely. However…

Chinese M2 money supply grew by 16.6% from 15.7% when economists foresaw a contraction to 15.4%. New loans grew to (RMB) 679.4bn from 535.6bn when 600bn was forecast. These numbers hammer home the concerns raised by the IMF last week that China's credit growth and resultant higher commodity prices put the Chinese economy in danger of a bubble-and-bust – something it was quite adept at in the 1990s. CPI inflation jumped to 5.4% from 4.8% when 5.2% was expected.

This leaves us with the inevitable yin and yang. The yin is that markets can be pleased China's economy is not crashing (we'll ignore the fact these numbers are largely cooked up in Beijing) but the yang is that runaway inflation means further monetary tightening. 

And before that idea had time to germinate, Beijing chimed in with a swift monetary response. On the weekend the People's Bank of China raised its bank reserve requirement ratio by another 0.5% to mark the tenth RRR increase in 2011. It is assumed a cash rate increase will not be too far behind.

By contrast, the US March headline CPI rose 0.5% (month on month) as expected, driven by higher energy and food costs, but the core CPI rose only 0.1% compared with expectations of 0.2%. This provided relief for a Wall Street becoming increasingly concerned about inflation at home, albeit there are strong arguments to suggest that to ignore rising energy costs in focusing only on the core CPI is to ignore the rising impact on the US consumer. The Fed nevertheless believes high commodity prices are “transitory”, so end of argument.

US industrial production rose for the fifth month running, adding 0.8% in March compared to a 0.6% estimate. Capacity utilisation rose to 77.4% from 76.9% which should be positive news for employment. This number is still below the 80% average of the past forty years, and is one reason why the Fed still does not fear inflation. The Fed's stance is backed up by a lack of any evident wage inflation.

Economists had expected the Empire State (New York) manufacturing index to fall to 15.5 this month from 17.5 in March, but instead it rose to 21.7 to mark its highest level in twelve months. Michigan Uni's fortnightly consumer sentiment index jumped to 69.6 from 67.5.

Wall Street had begun to feel a little concerned the US economic recovery was tiring, so these numbers went a long way to assuaging those fears. With the US economy chugging along and China's easing only slightly, one might suggest everything's going to plan. So on Friday the Dow rose 56 points or 0.5% and the S&P gained 0.4% to 1319.

The solid economic data nevertheless saved Wall Street on Friday following a disappointing earnings report from Dow component Bank of America. BofA cited sluggish credit growth in posting only modest revenue gains, and missed by a long way on earnings expectations. House prices are falling again, and that means a worrisome outlook for mortgage foreclosures.

Last week saw four big company reports in Alcoa, JP Morgan, Google and Bank of America. Each was disappointing in its own way, which is not a good start to the season. BofA shares fell 2.4% on Friday.

There has been an expectation in the market that on reaching new post-GFC highs, investors would begin to switch out of the driving force of outperforming energy and material stocks and into the underperforming financial sector. That certainly wasn't to be on Friday.

Chinese and US data provided a boost to expectations of commodity demand, so Brent crude rose US$1.45 to US$123.45/bbl while West Texas made a similar move up to just under US$110/bbl. This is the level at which Goldman Sachs decided it was time to get out of oil last week. And recalling that earlier “yang” of inflation, note that gold jumped US$13.00 to a new nominal record of US$1486.70/oz and silver surged another 2% to US$43.04/oz.

Base metals were a little less enthusiastic given traders are wary of the approaching seasonal slowdown in demand. Gains of around 1% were the norm but copper and zinc fell 0.5%.

In currency markets, the euro slipped when Germany suggested a restructuring of Greek debt “would not be a disaster”. That along with positive US data saw the US dollar index up slightly to 74.82, but the Aussie continued on its merry way to US$1.0569.

Were Greece to restructure its debt, one assumes Ireland and Portugal would follow in a heartbeat. Sovereign bond yields of all three blew out again on Friday and that money found its way into US bonds. The benchmark US ten-year yield fell 10 basis points to 3.41%. Europe is clearly more of a concern in bond markets than global inflation.

The SPI Overnight rose 16 points or 0.3%.

Friday's US data may have been positive, but it could be a different story this week as various housing data are rolled out. Monday sees the NAHB housing market sentiment index, Tuesday housing starts, Wednesday existing home sales and Thursday the FHFA house price index. Thursday also sees the Philly Fed manufacturing index and the Conference Board leading economic index.

In terms of blue chips, this week is one of the busiest in the US reporting calendar. Highlights include Goldman Sachs, Morgan Stanley, American Express (Dow), General Electric (Dow) , Intel (Dow), IBM (Dow), Yahoo, Apple, Johnson & Johnson (Dow), McDonalds (Dow), Freeport McMoRan, AT&T (Dow) and Verizon (Dow). Tonight the week kicks off with Citigroup.

On the economic front in Australia, a quiet week sees minutes of the last RBA meeting released on Tuesday, Westpac's leading economic index on Wednesday along with March quarter import and export prices, and the March quarter producer price index on Thursday.

It's all go in the resource sector quarterly production report season, with this week featuring Newcrest ((NCM)) and Woodside ((WPL)) on Tuesday, BHP Billiton ((BHP)) and PanAust ((PNA)) on Wednesday and Santos ((STO)) on Thursday. Woolworths ((WOW)) provides a quarterly retail sales report today followed by Wesfarmers ((WES)) on Wednesday.

Friday this week is of course Good, so all non-Asian markets are closed. The US only has the one day off for Easter, the UK gets the Monday off as well, and Australia and New Zealand get an extra day on Tuesday for Anzac Day. So what does a poor, overworked Overnight Report writer looking forward to a five day break do?

Okay. Friday's regular “Next Week At A Glance” will be published this Thursday and a “Monday Report” will be published on Tuesday, catching the two offshore sessions of Thursday and Monday and previewing the week ahead. Otherwise, FNArena will be “closed” from Friday through Tuesday, albeit the website will be accessible as always.

Due to the Easter break there will be no media appearances by FNArena celebrities this week. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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