Chinese Data Surprised to the Downside, Deepening Worries that Growth has Peaked

15 May 2017 15 May 2017

FrederiElia

Investors act cautiously in Asia Monday as China has just released a set of weaker-than-expected macroeconomic data, sending more signals that the country’s activities growth has peaked in the first quarter. This followed last Friday’s US dataflow disappointment. Chinese retail sales expanded+10.7% y/y in April, easing from +10.9% in the prior month. The market had anticipated a milder moderation to +10.8%. Industrial production growth slowed to +6.5% y/y, March’s +7.6. The deceleration came in more severe than consensus of +7%. Urban fixed asset investment expanded +8.9% in the first 4 months of the year, down from +9.2% growth through January to March. The market had antedated a growth of 8.9%.

Recall that US headline CPI eased to +2.2% y/y in April, from +2.4% a month ago. The market had anticipated a milder slowdown to +2.3%.. Excluding food and energy prices, the core CPI moderated to +1.9% y/y in April from March’s +2%. The market had anticipated it to stay at +2%. Consumer confidence stayed unchanged at 112.7 in May. Retail sales gained +0.4% m/m in April, after contracting -0.2% in the prior month. This came in lesser than expectations of a stronger growth of +0.6%. Excluding auto, retail sales grew +0.2% m/m, after the flat reading in March. This also missed consensus of a 0.5% growth. Softer-than-expected CPI and weak retail sales sent Treasury high (yields lower) although hopes of a Fed funds rate hike in June remained intact.

As a dove, Chicago Fed president Charles Evans reiterated that he saw the risks to the inflation outlook remained predominantly to the downside. Speaking in Dublin, Ireland, Evans noted that the "lingering" and "important" difficulty is that "inflation pressures are still under-running our +2% objective in the US" and "the downside risks still predominate". In another interview, he added that he could support two more rate hikes this year but believed only one would be appropriate if the outlook deteriorates. Separately, Philadelphia Fed president Patrick Harker reaffirmed his view of two more rate hikes this year. He added that he prefers the balance sheet reduction to begin after two more rate hikes, but could support after only one if data warrant.

For the week ahead, the US would release its housing starts and permits for April on Tuesday. Also come on that day is the April IP report. Thursday comes the Philadelphia Fed manufacturing survey for May and the Conference Board's leading index for April. Cleveland Fed's Mester would be speaking on Thursday whilst the St Louis Fed's Bullard and San Francisco Fed's Williams would be speaking on Friday.

In the Eurozone, Germany's ZEW economic sentiment, due Tuesday, probably rose to 22 in May from 19.5 a month ago. This is followed by Eurozone's final estimate of April's CPI on Wednesday. The focus in the region is probably speeches from policymakers with Draghi, Praet, Mersch, Nowotny, Lautenschlaeger and Constancio due to talk throughout the week. In the UK, Tuesday comes the inflation report for April. Headline CPI might have accelerated to +2.6% y/y in April, from +2.3% previously. Core CPI probably accelerated to +2.3% y/y, from +1.8% in March. The April PPI report would also be released on Tuesday. We would have a glance on UK's job market condition with the releases of the payrolls and jobless claims data on Wednesday. These would be followed by April's retail sales data for April on Thursday.

Commitments of Traders:

Speculators were bearish over the energy complex in the week ended May 9. Net LENGTH for crude oil futures declined -44 393 contracts from a week ago to 328 751. Net LENGTH of heating oil dropped -4 293 contracts to 12 341 while net LENGTH for gasoline fell -11 362 contracts to 29 806. Net LENGTH for natural gas dropped -1 447 contracts to 20 922 for the week.

Speculators were also bearish over the precious metal complex last week. Net LENGTH for gold plummeted -39 628 contracts to 150 006, while that for silver futures fell -17 712 contracts to 53 655. For PGMs, net LENGTH for platinum dropped -7 301 contracts to 10 240 while that for palladium slid -884 contracts to 20 609.