Market Willing to Wait, for Now - Ahead of Wall Street

Thursday, March 13, 2014

The takeaway from this morning's litany of economic data, both from the home front as well as from China, is that of a mixed picture. The Chinese data provides further confirmation of the overall soft tone of recent readings from that country. But the U.S. data is at best neutral, with weather as the accepted explanation for its loss momentum from the second-half 2013 trend line. The markets are ok with this weather explanation for now, delaying its expectation of growth resumption by a few months.

Of this morning's U.S. data, the Jobless Claims reading is undoubtedly positive as it showed that the pace of lay-offs was continuing to come down. The Retail Sales report for February, however, was somewhat mixed – the February reading came in better than expected, both on the ‘headline' as well as ex-autos & gasoline, but the significant negative revision to the January numbers provides for a somewhat of a flat finish for the two-month period. Weather is most likely at play in the Retail Sales numbers, as it has been persistently in all of recent economic data.

The big picture view of the U.S. economy is that it started expanding at a sustainable +3%-plus pace in the second half of 2013, but was pulled down temporarily by this year's unusually harsh winter. As a result, GDP growth is expected to be below +2% in current quarter, but is expected to go up to close to +3% in Q2 and beyond. The market has given the economy a pass for Q1, but will be eagerly waiting for growth resumption in the coming days.

Recent Chinese data has been on the weak side as well, similar to what we have been seeing on the home front, with today's Industrial Production data along the same lines. Industrial Production for the first two months of 2014 came in weaker than expected, the slowest growth pace for this period since 2009. Other data released today like retail sales and construction spending also came in on the weak side. This follows the unusually weak export numbers for February released over the weekend. The export numbers could potentially have been distorted by the Lunar Year, which tends to jump between January and February, but the data for industrial production and retail sales combine those two months primarily to adjust for the holiday.

Questions about China's growth outlook have been lingering for more than a year (remember the hard-landing vs. soft-landing debate), but the issue has really taken the spotlight lately and has become a major headwind for industrial commodities like copper, iron ore, and coking coal. Copper has been particularly hard hit in recent days, as concerns about the country's financial system has added to pressure on the commodity (copper is reportedly widely used as a collateral for loans in the shadow banking system). Reports today in the Chinese market were pointing to another company in financial distress, which comes after the first corporate debt default by a local company last week. These financial vulnerabilities appear to be magnifying the effects of the ongoing economic slowdown that today's industrial production data reconfirmed.

We will see how these questions about the U.S. and Chinese growth outlooks unfold in the coming days. The market appears to be fairly accommodating at this stage, but may not be as patient if the trend doesn't improve going forward.

Sheraz Mian
Director of Research