Global Daily – Positive surprise from China

by: Arjen van Dijkhuizen , Maritza Cabezas

Global-Daily-Insight-26-February-2015.pdf ()
  • HSBC’s flash Manufacturing PMI for China outbeats expectations, climbing back to above 50 …
  • … supporting our view that ongoing measured stimulus will help China to avoid a hard landing
  • US housing data mixed in January, but improvement ahead

China’s Year of the Goat[1] starts with better PMI data …,

After dropping below 50 in the past two months, HSBC’s flash estimate for the manufacturing PMI rose to a four-month high of 50.1 in February, much better than consensus expectations (49.5). Looking at the composition, domestic demand components showed some improvement. The manufacturing output index reached a five-month high of 50.8 (January: 50.3). By contrast, new export orders fell sharply to 47.1 (January: 50.2), the first reading below 50 since April 2014. Input and output prices also remained in contraction mode. Interpreting the February outcomes warrants some caution, however, as the numbers are likely to show some distortions related to the Chinese New Year holiday (18-25 February).


… confirming that Chinese slowdown remains gradual …

The latest macroeconomic data are consistent with our view that the Chinese economy is undergoing a gradual slowdown, while a hard landing can be avoided. Admittedly, the January activity data were weak, but we should bear in mind that these were also impacted by special factors such as different timings of the Chinese New Year, distortions due to over invoicing practices and the drop in energy prices. Meanwhile, aggregate financing and new bank loans surged in January, climbing back to levels seen in early 2014. This suggests that recent monetary easing measures (cuts in policy rates and bank reserve requirements, tweaking of loan-to-deposit ratio and extension of medium-term lending facility) are having an effect.

 … as the authorities remain prepared to add stimulus

The authorities keep stating that they can live with lower, but more sustainable growth. Still, their recent actions prove that they remain prepared to step in, if needed to prevent the economic slowdown from becoming too sharp. Going forward, we expect more measured monetary easing (around 50 bps in policy rate cuts, tweaking of RRRs etcetera), while targeted fiscal stimulus will likely remain in the authorities’ toolbox as well. Aggressive easing, as seen in Japan and other advanced economies, is not on the cards, as that would run counter to the overall strategy of rebalancing and deleveraging.

[1] Also referred to as Year of the Sheep or Year of the Ram.

26 Feb

US housing data mixed in January…

After a new round of housing data, we are seeing that the recovery in the housing market is a bit choppy. Housing demand was weak in January, following strong upward revised data in December. Existing home sales fell 4.7% mom from 2.4%, while new home sales declined -0.2% mom from 11.6%. Meanwhile, forward looking housing data, including January’s inventories of existing home sales are hovering near pre-crisis levels. Indeed, at the current sales pace it would take 4.7 months to exhaust the supply of existing homes. The construction of more homes could help ease the situation. Despite the drop in housing permits and housing starts in January, the home builder sentiment index is still above-50 reading, indicating most builders remain optimistic about future conditions.  On top of this, the latest loan survey shows that there has been a modest number of banks easing their lending standards.

 … but improvement ahead

Other factors remain supportive. An improving labour market should gradually boost housing demand. We expect a pickup in housing activity, along with lower oil prices that will lift consumer spending growth. Moreover, the housing market is now more resilient. Despite severe weather conditions in the beginning  of 2014 and the run-up in house prices, which started in 2013 and continued until the first half of 2014, the housing market moved slowly in the right direction.