Capital Markets: "Dollar Remains Firm as China Cuts Growth Target and Taxes, while EMU PMI Surprises on Upside"

From Marc to Market:

Overview: It is an eventful day, but the capital markets are taking it in stride. Equity markets are mixed. Asia may have been weighed down by China's shaving its growth target and announced around CNY2 trillion (~$300 bln) in tax cuts to support the economy, though Chinese stocks edged higher. India was the other major market to rise in Asia and this despite the US giving 60-day notice that its preferential trade treatment would end due to the lack of sufficient reciprocity. Turkey is also going to have this privilege removed, but in its case, it is because of good behavior the sense that it no longer qualifies as a developing country for this assistance purpose and its stock market reacted less favorable. Europe equities are firm as the Dow Jones Stoxx 600 tries to extend its advance for a fourth session. The service PMIs generally surprised on the upside in Europe, with Spain the notable exception. Benchmark 10-year yields are mostly 1-2 basis points firmer with notable exceptions in Australia and New Zealand. The Reserve Bank of Australia remained on hold as nearly universally expected. The dollar is firmer against most currencies. Among the majors, the Swedish krona is the exception as the stronger than expected PMI follows last week's Q4 GDP upside surprise underpins the currency. The Philippine's peso is suffering its largest loss in several years following what is seen as a political appointment to head the central bank.

Asia Pacific
Economists raise questions about the veracity of Chinese economic data. Yet, we can glean much insight into the state of the economy by the measures proposed to address it. We have argued that officials have had their "Draghi moment" and will do whatever it takes to support the economy in the face of US tariffs and during the 70th anniversary of the Revolution. It is as if the CCP is renewing its pledge to the Chinese people to deliver better growth while tightening its grip on politics. The focus of China's new measures is on tax cuts more than spending increases. Some initiatives, like the three percentage point cut in the highest of three VAT rates, are meant to discourage capital outflows. There will also be more targeted cuts in the required reserve ratio. The stimulus program is estimated to be around 1.25%-1.50% GDP. The GDP target was lowered to 6.0%-6.5% from about 6.5% last year. The budget deficit goal is 2.8% of GDP. Last year's goal was 2.6%. The call for a stable yuan, apparently demanded the US trade negotiators, was repeated at this year's National Party Congress. The disappointing Caixin service PMI (51.1. vs. 53.6 in January) was seen as old news in light of the economic stimulus announced.

Japan's service PMI improved to 52.3 from 51.6, but because of the manufacturing slump, the composite PMI slipped to 50.7 from 50.9. Japan is expected to revise up its estimate for Q4 GDP from 1.4% at an annualized pace to 1.7%, at the end of the week. New Capex figures are behind the expectation. Japan is still going forward with the retail sales tax hike (from 8% to 10%) in October. The government is rolling out a number of different tax breaks to underpin consumption.

The Reserve Bank of Australia left the cash rate at 1.50%, surprising no one. Despite the RBA's claims of neutrality, the market is gradually pricing in a greater chance of a cut in the second half. The composite PMI slid to 49.1 from 49.7 of the flash reading and 51.3 in January. Fourth quarter GDP will be reported tomorrow. There is a downside risk to the 0.3% median forecast, which would be the same as Q3 18. Today, Australia reported that net exports shrank 0.2% in Q4. After a 0.4% gain in Q3, economists expected a 0.1% contraction in Q4.

The dollar has been confined to about a quarter of a yen range below JPY112.00. There are nearly $3 bln in options struck between JPY111.90 and JPY112.00 that expire today. Above JPY112 that we may see after the options cut, the next target is near JPY112.60. The Australian dollar was sold to nearly $0.7065, its lowest level since February 12. Resistance is now seen in the $0.7090-$0.7100 area....

...MORE