Capital Markets: "China Data Surprises to the Upside while Europe's Manufacturing PMI Disappoints"

From Marc to Market:

Overview: Despite better than expected Chinese data, and last week's investor-friendly developments, Asia Pacific equities were mixed. Australia led the advancing bourses with a 1.6% gain, its largest for the year despite the government revising down growth and wages. China, Taiwan, and Indian markets also moved higher. Europe's Dow Jones Stoxx 600 is extending its advance for the fourth consecutive session, despite disappointing flash PMIs to reach new record highs. US shares are trading to the upside, and the S&P 500 has a three-day rally in tow. Benchmark 10-year yields have mostly edged lower, though the Australian yield tumbled 10 bp as the government is reluctant to use fiscal policy to support the economy. The US 10-year yield is slightly firmer, around 1.83%. The dollar is trading with a heavier bias against the major currencies, emerging market currencies are mixed, with the Turkish lira, Chinese yuan, and Mexican peso among the decliners. The South African rand and Russian rouble are leading the advancers with around 0.4% and 0.25% gain, respectively. Gold and oil prices are little changed.

Asia Pacific
China's November industrial production and retail sales rebounded. Industrial output rose 6.2% from 4.7% in October and expectations for a 5% gain. Retail sales rose 8% from 7.2%. First, many are skeptical of Chinese data in general and especially if it posts gains when the economy is seen slowing. Second, the strength is dismissed by others on ideas it was flattered by quarter-end seasonal quirks and Singles' Day. However, we are a bit less dismissive and see other potential signs that official efforts to stabilize the economy may be working. China's infrastructure push appears to be yielding results. That seems to be what the higher construction material prices, like cement, steel rebar, and construction aggregate.

It is hard to untangle how much of the apparent slowdown of the Chinese economy is a function of its own internal dynamics and how much is due to trade tensions. In terms of a reduced volume of exports to the US, there is the kernel of truth in claims that China paid for the tariffs. It paid for the tariffs in terms of quantities; it sold fewer goods. Importers paid the tariff, of course, but the impact on overall imported prices, and inflation more broadly, was minimal. Ironically, it may be China's required purchases of US foodstuffs and other goods that may help underpin US prices going forward.

The devil may be in the details, but in this holiday season, the importance of the US-China agreement is to be found in the big picture that the trade tensions have not gotten worse. Each seems to be determined to continue to frustrate the ambitions of the other. The actual tariff relief for US businesses and consumers is minor. China has long offered to step up its purchases of US goods to reduce the bilateral imbalance. Indeed reducing the US deficit with China will prove considerably easier than improving the overall external position with a change in US savings and investment. US reports claim that the agreement includes a $200 bln increase in exports to China, of which $40-$50 bln will be agriculture products, stretches credence. In 2017, before the tariff conflict began, US goods exports to China were less than $130 bln, of which agriculture was about $24 bln. From 2007-2017, US exports to China rose by roughly 85% compared while exports to the rest of the world by a little more than 20%....

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