China data spooks Asia

China numbers send equities lower

China’s data dump today contained some unpleasant surprises as each release missed expectations, darkening the mood across Asia, already nervous after a soft close on Wall Street following soft inflation results. China’s Fixed Asset Investment fell to 8.90% in August, just below 9.0% expectations but a retreat from last month’s 10.0%. Industrial Production for August fell to 5.30% versus 5.80% expected but the worst surprise was Retail Sales. These slumped to just 2.0%, a huge miss on pre-release 7.0 % expectations.

Government officials tried to put a brave face on the data, blaming flooding and lockdowns in August.  Admittedly, the Industrial Production data was likely affected by rising input costs, semi-conductor shortages and logistical disruptions, the same issues afflicting the rest of the world. With regards to the Retail Sales data though, one can’t divorce the slump in consumer confidence from the ongoing shared prosperity multi-sector government crackdowns, where job losses are an inevitability.

China is unlikely to hit the red button and open the fiscal spigots immediately. Another month of weak data next month may change that narrative though. And we can pencil in a RRR cut by the PBOC sooner rather than later. The expectations of government largesse may be limiting the fallout in China equities today. But with the sectorial clampdowns, the Evergrande sage and withering domestic consumer confidence, the downward repricing of China equities could be far from over, that’s certainly what I believe.

Overnight, US inflation data came in below expectations with headline Inflation for August MoM rising by 0.30%, and Core Inflation August MoM printing at 4.0%. That has further reduced Fed tapering nerves for next week’s FOMC meeting. However, a look below the bonnet of the data shows that although used car prices and airfares retreated, food, energy and rental prices increased. Notably, housing-related items are 30% of the CPI basket and rents typically lag rises in house prices. Readers can do the maths on that one. A look at natural gas prices globally, and we haven’t even got to the Northern Hemisphere winter yet, also makes unnerving reading. US gas price increases are the best of a bad bunch, but you wouldn’t bet against energy become a major concern for inflation readings ahead. Stagflation anyone? Sticky inflation may have taken a few punches from transitory inflation overnight, but it is definitely not out for the count.

Apart from US Retail Sales on Thursday evening, the rest of the world’s data calendar is second-tier for the remainder of the week. Next week is a central bank policy decision frenzy, with the FOMC as the main event, with more potential for thematic moves. That will leave markets this week trading on sentiment and headlines. At this stage that sentiment is somewhat glum, dominated by growth and recovery concerns. Equities are likely to struggle for the remainder of the week on that basis, and haven-orientated trades such as a higher US dollar enjoying a few days in the sun.

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