The Overnight Report: And We’re Back

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By Greg Peel

The Dow closed up 3 points while the S&P gained 2% to 2022 and the Nasdaq added 0.4%.

Good morning. To those who aren’t yet sick of hearing it this late in January, Happy New Year, and to all welcome to another fun-packed year of the Overnight Report. It wouldn’t be an annual “break” without a sufficient level of detachment from the daily norm, hence I will admit to having barely seen a television or newspaper since Christmas, but one could not escape a few goings on. In particular, a fair bit of stock market volatility, oil down another ten bucks since I signed off on 2014, gold up a hundred dollars, the US ten-year under 2% and the SNB sending a handful of forex shops to the wall.

So let’s get down to it. Yesterday was all about China, and the release of that country’s annual GDP result. Year-on-year growth for the December quarter came in at 7.3%, beating 7.2% consensus expectation. Calendar year growth for 2014 came in at 7.4%. What’s the difference you ask? Well no one outside of Beijing is entirely sure, but apparently there is one. Given the government set a target at the beginning of 2014 of “around 7.5%”, one has to suggest Beijing has done a pretty good job all up, considering the challenges faced during the year. Yet that is not what the headlines are saying.

The headlines are highlighting the lowest Chinese growth rate in 24 years, and the first “miss” of the government’s GDP target in 16 years. On the first matter, if the Chinese economy had continued to grow at the same pace of previous decades, it would have needed a new planet from which to source its resources. Nothing can grow exponentially forever. A slowing pace is commensurate with the size to which China’s economy has now grown – still much smaller than that of the US on traditional measures, but apparently now bigger than the US if one uses certain “purchasing power parity” measures, which basically work off factors such as the price of a pint of milk vis a vis the average wage, or the like. A pace of 7.4% growth in the current global environment is still pretty impressive.

On the second matter, one is tempted to argue Beijing orchestrated the “miss”, that is 7.4% growth instead of 7.5%, in order to dismiss rest-of-world suggestions that Beijing orchestrates its numbers. But who knows, and it’s all we’ve got.

There is little doubt China’s growth rate has slowed, nonetheless. On a quarter-on-quarter basis, the Chinese economy grew by 1.9% in both March to June and June to September but only by 1.5% in September to December. Yet a look at yesterday’s accompanying monthly data for January shows industrial production growing at 7.9% (year-on-year), up from 7.2% in December and beating expectation of 7.4%. Retail sales also beat expectations with an 11.9% gain, up from 11.7% last month. Only fixed asset investment fell short, dropping to 15.7% from 15.8%.

The story for China in 2015 will be one of concern over low inflation, but thus plenty of room for fresh stimulus, and on the other hand anticipation over what China can do in a world of US$45 oil and US$68 iron ore.

Low inflation is a matter across the globe, and particularly in the US. And so no doubt from here on we can all be worn down by never ending debate of will they, won’t they and if so, when, with regard the first Fed rate hike. Such is life. But more immediately, all eyes are on Thursday night’s ECB policy meeting. Debate on this front is also fierce, with those believing this is finally the month Mario Draghi will pump up the printing press arguing the toss on just how many euros will be printed, while yet others believe he yet again will do nothing.

Anticipation on the ECB front kept Wall Street flat last night by the death, despite some ups and downs during the session. The macro is overriding the micro as the US December quarter result season progresses. The US dollar index is up 0.5% to 93.04, which is why the Aussie is down 0.4% over 24 hours to US$0.8175. The Aussie did post a rally following yesterday’s Chinese data release, focussing on 7.3% GDP beating 7.2% forecast and January industrial production posting a strong result, but it has proven short-lived.

Gold continued its rally last night, rising US$14.70 to US$1291.90/oz, while the US ten-year yield is down a basis point to 1.81%.

By rights a new stimulus package from the ECB would weaken the euro and strengthen the US dollar, thus sending commodity prices lower ceteris paribus. But given much anticipation on the lead-up, a quiet session on the LME last night saw squaring up to the upside. Copper rose 0.8% with the other metals bar tin posting larger moves.

Spot iron ore is down US40c to US$67.40/t.

And on to the commodity du jour. On Monday night the Iraqis announced the country was achieving record oil production, and the Iraqi oil minister suggested US$25 oil could be withstood. The US was on holiday on Monday, so last night’s delayed response was a US$1.25 fall in West Texas crude to US$46.68/bbl on the new March delivery front month and a US58c fall in Brent to US$48.21/bbl (already March delivery).

Local futures traders are optimistic this morning, given the SPI Overnight is up 17 points or 0.3%.

The Bank of Japan will hold a policy meeting today, although this is overshadowed by the big one on Thursday night. Locally, the monthly Westpac consumer confidence survey is due out today and amidst the resource sector quarterly production reports, BHP Billiton ((BHP)) will be the highlight.

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