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Weekend Data from China

06/11/2012
Last week, the People’s Bank of China (PBOC) continued easing its domestic monetary policy with its first interest rate cut since 2008. Clearly the PBOC remains focused on growth stimulus as it has also cut the Reserve Requirement Ratio (RRR) three times over the past nine months. What is impressive to me is the ability of the PBOC to achieve its desired goal, whether tightening or easing.
 
In 2008, China rolled out arguably the most impactful global fiscal stimulus plan - $500 billion in shovel ready projects - which lifted global markets from the 2009 “winter of discontent.” In November 2010, a tightening cycle was initiated, ending in June 2011, which successfully arrested the uncomfortable rise in domestic inflation. Currently, the PBOC is attempting to revive a slowing GDP (Q1 2012 8.1%), the weakest since Q2 2009 (Figure 1.1).
 
Q2 2012 China GDP will be released on July 12, with analysts expecting further slowing in the 7% to 7.5% range. However, I remain confident in my expectation that the PBOC will once again achieve its desired goal and provide a tailwind to global markets and the economy in the second half of 2012.
 
Over this past weekend, critical economic data points were released from China. Although some in the media may seek to quickly grab the negativity (Industrial Production, Retail Sales), the evidence presented aligns with further PBOC easing ability.
 
Let’s take a look at this weekend’s May data…
 
•   CPI (Figure 1.2) fell to 3.0%, below last month’s 3.4% and below estimates for 3.2%
•   PPI declined -1.4% from last month’s -0.7%; estimates called for a -1.1% decline
•   Industrial production rose only 9.6%, below estimates for a 9.8% rise but above last month’s 9.3%
•   Retail sales rose 13.8%, below consensus of 14.2% and last month’s 14.1%
•   Exports surged 15.3%, well above last month’s 4.9% and estimates for 7.1%
•   Imports surged 12.7%, well above last month’s 0.3% and estimates for 5.5%
•   Trade balance posted another surplus $18.70 billion; last month’s surplus was $18.43 billion
 
Noteworthy within the data…
                          
•   China’s vehicle sales rose 16% year on year, to 1.61 million units in May, the third consecutive monthly rise
       o  As part of its growth stimulus measures, Premier Wen Jiabao on May 16 allocated $943 million USD of subsidies for vehicle purchases with engines smaller than 1.6 liters
       o  Also announced in May was a financial incentive program for used to new vehicles
•   Imports of crude oil in May were the highest on record, 5.98 million barrels per day (mbd), exceeding the previous high from February 2012 of 5.87 mbd
•   Imports of iron ore (China is the number global buyer) rose 11%, a three-month high
•   Overall exports to the United States rose 23%, the highest level for 2012
•   Overall exports to the European Union rose 3.4%, the highest level for 2012
       o  April -2.4%; March -3.1%; February +2.2%; January -3.2%
 
The materials, industrials, and energy sectors are 2012 laggards, for the current quarter in particular (Figures 1.3, 1.4, 1.5). I would watch those three sectors closely over the coming week to determine whether some of this weekend’s positive China economic data points contribute to evidence of a trough in those sectors.
 
Figure 1.1 China GDP, June 2008 to June 2012

Source: Bloomberg
 
Figure 1.2 China CPI, June 2010 to June 2012

Source: Bloomberg
 
Figure 1.3 XLB Materials SPDR ETF, June 2011 to June 2012


Source: Bloomberg
                                  
Figure 1.4 XLI Industrials SPDR ETF, June 2011 to June 2012

Source: Bloomberg
 
Figure 1.5 XLE Energy SPDR ETF, June 2011 to June 2012

Source: Bloomberg

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