NEW$ & VIEW$ (16 APRIL 2013)

SOFT PATCH WATCH

The string of softer data continues:

The Empire State’s business conditions index declined to 3.05 in April from 9.24 in March.

The New York Fed survey is the first factory report released by regional Fed banks for April. (…) The Empire subindexes were generally weak but still expansionary.

The new orders index declined to 2.20 in April from 8.18 in March. The shipments index plunged to 0.75 from 7.76.

Despite weaker output, labor conditions improved sharply this month. The employment index more than doubled to 6.82 in April from 3.23 in March, and the workweek index jumped to 5.69 from 0. (Chart from Haver Analytics)

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo declined to 42 this month following an unrevised March reading of 44. Expectations were for an index reading of 45 in April. The latest was the lowest since November. Nevertheless, the index level remained up by three quarters versus one year ago. The index of single-family home sales fell to 45 while the index of sales during the next six months improved to 53. Also down m/m was the home builders index of traffic of prospective home buyers. It fell sharply m/m to 30, its lowest level since July.

  • ISI`s economic diffusion index has declined for a second week.
  • ISI`s company surveys and their diffusion indices fell again.

AND NOW CHINA?

 

Slower China Growth Signals Days of Miracles Are Waning

After three decades of annual economic growth in China averaging around 10%, many industries are now experiencing less bling and more blah.

image(…) Retail sales growth last month slid to 12.6%, year on year, down from 15.2% at the end of 2012. Industrial production growth also faded in March, evidence that a late-2012 rebound could be losing steam. (…)

Shortly before he became president, Xi Jinping set the tone for a downshift with actions that appeared to equate indulgence with corruption. During a visit to Hubei Province, he shunned trappings of high office and stayed at a small hotel. His menu at one meal included just four dishes and one soup.

Mr. Xi’s humility has struck like religious canon. To avoid appearing corrupt, lower-ranking officials suddenly shun five-star hotels, as well as such delicacies as bird’s nest soup and even fruit, according to restaurant and hotel managers.

Less indulgence by officials “may be the largest factor” in dragging down first quarter growth, according to Lu Ting, China economist at Bank of America Merrill Lynch; 10 million of them carry government-issued credit cards that, on average, rack up annual spending of about $5,800, or a total of $58 billion, according to Shanghai research firm Emerging Asia Group.

One measure of the funk is a 94% price drop for the yellow-colored dao yu, or knife fish. Two years ago, one of the Yangtze River delicacies traded wholesale for more than $220. They now cost $13.

The new austerity also is deflating luxury markets for art, liquor, entertainment and clothing. (…)

Beijing hopes higher household incomes will trigger more personal consumption to rebalance the economy away from investment and exports. Consumption contributed 4.3 percentage points to China’s first quarter growth, compared with 2.3 percentage points from investment, said Sheng Laiyun, a spokesman for the National Bureau of Statistics. “Now we can say consumption has become the major driver of growth,” he said.

New restraint by formerly free-spending government officials should eventually channel more money into improving health care, education and other underfunded segments of the economy. The government has said it would raise social spending as a share of the budget.

But the immediate impact appears to be a drag on consumer spending, particularly at the top end. For the first time in 25 years, for example, banquet revenues fell during holidays at the start of 2013 compared with a year earlier, according to the Chinese Cuisine Association.

Demand appears to be shifting from gilded restaurants—with names like Mansion and Palace—to unpretentious-sounding places like Hefei’s Jinzhai Farm House. “If you don’t reserve here, you can’t get a table,” said owner Fan Ronghua.

China’s quick wealth fed hyper-expansion by the global luxury industry, which suddenly appears vulnerable. Only about a third of luxury shoppers surveyed this year by CLSA Asia-Pacific Markets said they would spend as normal during a sustained anticorruption campaign.

A decade ago, China’s top-earners mesmerized global marketers with their embrace of new and different experiences.

Today, nearly 62% of this group wished things “would stay the same” and more than half prefer staying home rather than attending parties, according to a survey by WPP PLC’s Young & Rubicam Group. “They’re feeling a lot of the hype was actually quite fake,” said Kaiyu Li, Y&R’s head of planning in China.

NBF Financial Sees Positives:

 

Analyst commentaries have been largely negative with regards to China’s Q1 GDP results which showed growth decelerating to 7.7% on a year-on-year basis, or 6.6% annualized on a seasonally-adjusted quarter-on-quarter basis. While we’re not thrilled about the
overall results, we’re not as downbeat as some. For one, China saw a similar performance in the same quarter last year and that didn’t prevent overall 2012 growth from eventually topping the government’s 7.5% target. We expect a similar pick-up later this year.

Also, the results confirm that the rebalancing of the Chinese economy continues as intended by the government, i.e. growth is tilting towards consumption and away from fixed investment. That’s a step in the right direction with regards to the sustainability of growth over the coming years. Moreover, as today’s Hot Charts show, trade contributed to China’s GDP growth for the first time in two and a half years, thanks to a rebound in exports, and that despite a strengthening yuan. That, perhaps, is a sign that global demand is firming up after a soft 2012.

image

But CLSA points out that:

While GDP growth was slower than expected, the most disappointing data point for the first quarter was the slowdown in income growth.

Urban household disposable income rose by only 6.7% YoY in real terms, down from 9.8% in 1Q12 and the slowest pace since 2001.  To put the 1Q13 rate of 6.7% in context, the average annual growth rate for the last decade was 9.3%.  A key factor was slower nominal wage growth:  up 8.3% YoY compared to 13.8% a year ago.

While 6.7% real income growth is something that most countries can only fantasize about, this is a surprisingly low number for China and raises questions about longer-term consumption growth as investment growth continues to slow.

The monthly average income of China’s 166m migrant workers was RMB 2,436 (US$ 390), up 12.1% YoY, after having risen by 16.6% in 1Q12.  Given that the working age population has just begun to shrink, we had not been expecting a significantly slower wage growth for unskilled workers.

Real per capital rural cash income also rose at a slower pace in 1Q, 9.3% YoY compared to 12.7% a year ago, due in part to slower growth in food prices.

. . . but retail sales held up

Despite slower income growth, real retail sales growth was 10.8% YoY in 1Q13, down only 0.1ppt from the first quarter of last year.

Markit Remains Upbeat on China:

(…) It is unlikely, however, that the disappointing data for  the first quarter represent the start of a renewed trend of slower economic growth in China, and it remains likely that GDP growth should pick up again in the second quarter.

First, a lag between the official data picking up after the PMI has risen is not unprecedented: GDP lagged considerably in 2009, for example. Markit’s PMI also fell sharply in February but rose again in March,
possibly reflecting a late pick up in growth in the first quarter which has not been fully captured by the official GDP data.

Second, it is not just the Markit-produced PMI that has signalled an upturn. A government sponsored survey signalled the strongest growth of manufacturing output for ten months in March as order books growth hit an 11-month peak.

Third, the message from companies in China is that the underlying trend in the Chinese economy is improving. Markit’s Business Outlook survey showed both China’s manufacturing and service sector companies growing more optimistic about prospects for the year ahead in the first quarter. Confidence hit a two-year high in manufacturing, while a near one-year high was seen in services.

Fourth, a sharp acceleration in bank credit growth in March should also feed through to higher activity in the real economy in the coming months.

Fifth, the data for the first quarter need to be treated with particular caution in the case of China due to the extended and widespread business closures for the New Year holidays.

The Chinese authorities have retained the 7.5% growth target for 2013 despite the weakness of the first quarter data, but many private sector analysts have already begun to downgrade their outlooks. Given the
uncertainties about growth in the first quarter, a reliable indication of growth momentum in the Chinese economy may only be really known until the second quarter.

South Korea in bid to kick-start economy
Bigger-than-expected supplementary budget aims to restore confidence

The government slashed its 2013 growth target to 2.3 per cent late last month from 3 per cent, citing slowing exports and sluggish domestic spending.

Colombia launches stimulus measures
Package aimed at easing appreciation of the peso

 

Brent Crude Falls Below $100

The price of a barrel of Brent crude oil fell below $100 for the first time in nine months as a selloff that started Monday continued.

Still travelling with my dead laptop…

 
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