Not Even More Fake Chinese Data Can Push Futures Higher

NotEven More FakeChinese Data Can PushFuturesHigher
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The good, if fake, Chinese "data" releases continued for a second day in row, dominating the overnight headlines with a barrage that included CPI, PPI, retail sales, industrial production, fixed investment, money growth, car sales, and much more (summary recap below). Needless to say, all the data was just "good enough" or better than expected. Yet judging by both the Chinese market (which is barely up, following the drop on yesterday’s "surge" in made up trade data) and the US futures, not even algos are dumb enough to fall for the goalseek function in China_economy.xls. Either that, or traders are taking the "rebound" in the Chinese economy as a further indication that the Taper (which will take place in September), will take place in September. And since global risk sentiment continues to be driven by the USDJPY, the Yen pushing to overnight highs is not helping the "China is bullish" narrative.

ForthosewhotakeChinese data seriously (whichwould mean notChina’sPremierLi), belowFollow a quickrecapofthemainChinese data viaBofA:

CPIinflationremainsunchangedinJuly

The 2.7% CPI inflation reading in July is slightly below the market expectation of 2.8% and unchanged from June. PPI inflation rose to -2.3% yoy in July from -2.7% in June, but the -2.3% reading is also below market expectation at -2.1% (and of course is negative). Since CPI inflation is still not close to the 3.5% cap set by premier Li, today’s inflation data should be positive for markets as the muted inflation reading should provide the necessary room for implementing a mini fiscal stimulus and avoiding monetary tightening

CPI inflation remains unchanged in July

Li’s Phillips Curve and CPI inflation in 2H13

Note China’s premier Li set 3.5% CPI inflation as the cap of his "appropriate zone" of macro economy (meaning that he will take actions to cool down the economy if CPI inflation exceeds 3.5%). By analyzing the current momentum, we predict that though monthly yoy CPI inflation will quite likely exceed 3.0% yoy in the remainder of this year, we believe the chance of surpassing 3.5% is small. And even though for some individual months CPI inflation could be quite close to 3.5% (especially in November), this might be mainly due to a low comparison base and it’s likely CPI inflation would dip below 3.5% again. What’s more relevant is that average CPI inflation in both 3Q13 and 4Q13 is likely to be below 3.5%, in our view. That said, though we don’t expect tightening of monetary policies, we believe the chance of rate cuts is extremely small. The PBoC at present will likely aim to cap interbank rates (especially 7-day repo at below 4.0%) with short-term tools (such as reverse repo, SLO and SLF).

Data details: Flat food prices

By breakdown, food inflation in yoy terms edged up slightly to 5.0% in July from 4.9% in June. In particular, vegetable prices rose by 11.8% yoy after increasing 9.7% in June, contributing 32bp to the 2.7% CPI, and meat prices increased by 5.9% after rising 4.8%, contributing 42bp to CPI. Within the meat category, pork prices rose by 3.0% after rising 1.1% in June. Non-food yoy CPI inflation remained flat at 1.6% in July.

In month-on-month terms (not seasonally adjusted), food prices were flat in July from June while non-food prices increased by 0.2%. Vegetable prices rose by 2.2% in July after dropping 5.2% in June, and pork increased by 1.7% after rising 4.6% in June. On the other hand, fruit and egg prices dropped by 6.5% and 1.4%, respectively, offsetting the higher vegetable and meat prices. How about sequential data with seasonal adjustment? A rudimentary way is to just check readings a year ago. Since food prices declined by 0.1% from June to July in 2012, it seems that food prices rose more this year. We believe the record hot weather in July contributed a bit to the rise of vegetable and meat prices.

Regarding PPI, it edged up to -2.3% yoy in July from -2.7% in June. In mom terms, it rose to -0.3% in July from -0.6% in June. The % mom PPI inflation may rise to positive territory in coming months with the help of improving investment demand and inventory restocking, in our view. In response, PPI in % yoy terms will also likely continue recovering.

July macro data came in stronger than expected

Industrial production (IP) growth jumped to 9.7% yoy in July from 8.9% in June and was significantly above market consensus at 8.9%. Output growth of major products has quickened, with that of steel products, nonferrous metals, power and cement up to 10.9%, 9.8%, 8.1% and 9.1% yoy from 7.2%, 6.7%, 6.0% and 8.8% respectively in June. Fixed asset investment (FAI) growth remained unchanged at 20.1% yoy in Jan-July from Jan-June, but monthly FAI growth rose to 20.1% yoy in July from 19.3% in June.

IP growth strengthened in July

In July (from June), headline IP growth accelerated to 9.7% yoy from 8.9%. The output growth of major products has quickened, with that of steel products, nonferrous metals, power and cement up to 10.9%, 9.8%, 8.1% and 9.1% yoy from 7.2%, 6.7%, 6.0% and 8.8% respectively in June. Meanwhile, crude oil output growth moderated to 7.1% yoy from 10.8% in June. Auto output growth in volume terms increased to 15.4% yoy from 13.5% in June.

Retail sales growth remained decent

Retail sales growth edged down to 13.2% yoy in July from 13.3% in June. In real terms, it moderated to 11.3% from 11.7%. Gold/jewelry sales remained a major driver for retail sales, by up 41.7% yoy in July after growing 30.2% in June. Food & beverage sales growth accelerated to 16.0% from 12.9%, while restaurant revenue softened to 9.1% from 9.5%. Sales growth of auto in value terms slowed to 9.1% from 11.4%.

FAI growth picked up its pace in July

Headline year-to-date FAI growth stayed at 20.1% yoy in July. In the month alone, it rebounded to 20.1% from 19.3% in June. Considering that PPI inflation was still quite negative at -2.3% yoy in July, FAI growth in real terms could be above 22.0%. Going forward, we expect the central government will quicken fund allocation to accelerate investment in urban infrastructure and railway project, which will likely support a small rebound in

Strong new loans vs. weak headline TSF in July

New loans dropped to RMB700bn in July from RMB861bn in June, but the RMB700bn reading is well above market expectation at RMB640bn. New MLT (medium to long term) corporate loans increased to RMB243bn in July from RMB194bn in June, suggesting improved funding for FAI. YoY loan growth ticked up to 14.3% in July from 14.2% in June, while yoy change of outstanding total social financing (TSF) slowed to 21.2% in July from 21.5% in June.

Why shall we not be too worried about "credit tightening"?

We do see some negative impact of the June interbank liquidity crunch on credit availability for the real economy as evidenced by the sharp fall in corporate bond issuance and bills, but we believe the impact is muted as Premier Li Keqiang’s team has taken decisive measures to calm the interbank market and to support growth. Note the PBoC in the past two weeks has conducted several reverse repos to inject liquidity and the 7-day repo rate has declined to below 4.0% again. We understand investors care about the declining TSF, but TSF double-counted credit in the past and some types of credit in TSF are merely intermediate goods anyway, so some "deleveraging" may not significantly affect the availability of credit for the real economy.

New loans and bonds to stay supported; no rate or RRR cuts

Looking forward, we expect bond issuance to recover and annual new loans to exceed Rbm9.0tn. We don’t expect rate cuts or hikes, and the government might choose other tools instead of RRR cut to inject liquidity. We believe that, as the central government taps an increasing amount of its own savings at the PBoC, even a slowing system-wide credit growth could deliver a growth around 7.5% yoy in 2H13. The chance of hard landing is extremely small despite many of China’s ills, and what happened in June most likely won’t be repeated. We are confident to maintain our 7.6% yoy GDP growth forecasts for 3Q13 and 7.5% for 4Q13, and we expect our competitors to revise up their growth forecasts in the next couple of weeks.

And so on

* * *

A news bulletin of key overnight data from Bloomberg:

Treasuries steady, 10Y yields little changed on the week after U.S. sells $72b 3Y, 10Y and 30Y debt in quarterly refunding and four Fed presidents expressed willingness to reduce QE purchases this year, possibly as soon as September. Sales of floaters in the U.S. have more than doubled from last year’s pace with investors seeking protection from rising rates as the Fed considers curtailing stimulus China’s industrial production rose 9.7% in July, more than forecast, while retail sales advanced 13.2% China’s broadest measure of new credit fell to a 21-month low as Premier Li Keqiang extended a campaign to curb a record expansion of lending that’s added risks to the nation’s financial system The Reserve Bank of Australia lowered its growth outlook as the economy transitions from mining investment, a process that may be aided by the currency falling further from its still “high level” Japan’s national debt exceeded 1 quadrillion yen for the first time, underscoring the case for Prime Minister Abe to proceed with a sales-tax increase to shore up government finances German regulators will review how the country’s banks made loans that didn’t appear on their balance sheets, obscuring the risk to investors, said two people briefed on the talks JPMorgan is negotiating final terms of a deal with U.S. securities regulators to end a yearlong probe of “London Whale” trades that led to the bank’s biggest trading loss ever, two people briefed on the talks said The State Department warned U.S. citizens to defer non-essential travel to Pakistan and pulled most American diplomats from its consulate in Lahore because of security threats posed by extremist groups in the region. Sovereign yields mostly higher. Nikkei little changed as JPY holds near June highs vs USD; Shanghai Composite +0.36%. European stocks mixed, U.S. equity-index futures lower. WTI crude, copper gain, gold little changed

Market Re-Cap via RanSquawk

Encouraging set of macroeconomic data from China, as well as M&A related news flow, saw stocks in Europe open higher, though the momentum was not sustained and as the session progressed, stocks edged into minor negative territory. Still, basic materials and telecommunications sectors outperformed, where KPN shares surged 19% after America Movil announced a public offer for the company.

There was little in terms of EU specific news flow, but data released by the ONS showed that the trade deficit narrowed to its lowest level in nearly a year, supported by a bigger than expected rise in UK exports. Going forward, market participants will get to digest the release of the latest jobs report from Canada and US Wholesale Inventories.

Asian Headlines

Chinese CPI (Jul) Y/Y 2.7% vs. Exp. 2.8% (Prev. 2.7%)
– July food inflation rises 5.0% Y/Y; unchanged M/M
– July non-food inflation rises 1.6% Y/Y; 0.2% M/M
PPI (Jul) Y/Y -2.3% vs. Exp. -2.1% (Prev. -2.7%)
Chinese Industrial Production (Jul) Y/Y 9.7% vs. Exp. 8.9% (Prev. 8.9%)
– Industrial Production YTD (Jul) Y/Y 9.4% vs. Exp. 9.2% (Prev. 9.3%)
– Fixed Assets Excluding Rural YTD (Jul) Y/Y 20.1% vs. Exp. 20.0% (Prev. 20.1%)
Chinese Retail Sales (Jul) Y/Y 13.2% vs. Exp. 13.5% (Prev. 13.3%)
– Retail Sales YTD (Jul) Y/Y 12.8% vs. Exp. 12.8% (Prev. 12.7%)

EU & UK Headlines

UK Visible Trade Balance GBP/mln (Jun) M/M -8082 vs. Exp. -8350 (Prev. -8491 , Rev. to -8668)
– Trade Balance Non EU GBP/mln (Jun) M/M -2646 vs. Exp. -3800 (Prev. -4093 , Rev. to -4019 )
– Total Trade Balance GBP/mln (Jun) M/M -1548 vs. Exp. -2200 (Prev. -2435 , Rev. to -2612 )

UK Construction Output (Jun) M/M -0.8% vs. Exp. -1.9% (Prev. 0.0%, Rev. 0.2%)
– UK Construction Output (Jun) M/M 1.2% vs. Exp. 0.2% (Prev. -4.8%)
– ONS says Q2 Construction Output +1.4% Q/Q implies no change to Q2 GDP to one decimal place

Norway’s USD 760bln oil fund increased its holdings of stocks in the Q2 , sharply reduced its British bond holdings and picked up more Japanese government debt.

LCH.Clearnet revises margin parameters on some French and Spanish debt with the changes set to come into effect on 12 August 2013 and will be reflected as margin calls on the 13 August 2013.

The BoE’s MPC held three votes on Aug 1st meeting according to an official. The official said the MPC had a one-off vote on adopting guidance.

Equities

Commodities

IEA cuts forecast for global oil demand growth in 2014 by 100,000 BPD to 1.11mln BPD according to the monthly oil market report.
– Strong growth in North America to help lift non-OPEC oil supply by 1.4mln BPD in 2H on year.
– Saudi oil production hit 12-month high of 9.8mln BPD in July.

China’s July implied oil demand up 5.5% Y/Y.
Taiwan eases China investment curbs in trade zones

* * *

Finally, the traditional conclusion comes from the market recap of DB’s Jim Reid

Markets have got ‘China in their hands’ over the last 24 hours with a lot of focus on their fresh data splurge. The stronger Chinese trade data yesterday boosted sentiment and it will be interesting to see whether this will be followed up in today’s monthly data download from the Chinese National Bureau of Statistics (scheduled for release as we go to print this morning). Today’s data will include an update on China’s industrial production (consensus: +8.9%yoy), retail sales (+13.5%yoy) and fixed asset investment (+20%yoy). While we wait for those numbers, China’s July inflation numbers, which were published overnight, showed CPI remained at +2.7% yoy in July which is unchanged on the June print and is slower than the +2.8% expected. The PPI also printed below expectations (-2.3% vs -2.1% expected) and has remained in negative territory for 17 straight months. The subdued inflation data has sparked some calls for rate cuts. On the downside it may reflect the continued problem with overcapacity but for now the market want to see the positive. Heading into today’s data, Asian equities are trading with a touch weaker led by the Shanghai Composite (-0.6%).

It feels likes it been a long time since markets have received a boost from Chinese data surprises. After a poor run in Q2 this year, a period which included a spike in SHIBOR at the end of June, the Chinese dataflow has shown some tentative signs of stabilising in the last month or so. It’s still very early days, but yesterday’s above-consensus trade report does follow last week’s better than expected official manufacturing PMI (50.3 vs 49.8 expected).

On a wider scale, the Citi Economic Surprise Index for China has shown some signs of bottoming in June/July and has trended upward over the last month or so. In terms of the market, Chinese growth related assets such as the Hang Seng Chinese Enterprises Index (+6% from the June lows) and the Shanghai Composite (+5% from the June lows) have also followed a similar trend. On the anecdotal side, there were reports (Bloomberg) that Caterpillar’s excavator sales in China jumped 14%yoy in July versus down 1% in June. Iron-ore giant Vale SA said yesterday that they haven’t seen a significant deterioration in demand despite headlines about slowing economic growth and they expect a 17% increase in Chinese steel production this year. China’s customs ministry said yesterday that July iron ore imports were 17% higher than the previous month and we note that iron ore import prices are 20% higher now than in June. So it’s fair to say that there is some positive news amongst the pessimism. However this morning’s upcoming numbers will have a big say in whether this will be sustained.

The better China trade data sparked a broad-based rally in mining stocks yesterday. The S&P500 metals and mining index closed at +4.7% (vs S&P500 at +0.4%) in its best gain in almost a year. Amongst the miners, gold companies had a very strong day possibly helped by short covering. Stocks in gold companies such as Barrick Gold (+10%) and Newmont (+8.6%) were up sharply, and spot gold was up 2% partially reversing what had been a weak fortnight. Other China-beta stocks such as Alcoa and Caterpillar were among the best performers. On the data front, US initial jobless claims for the week ending August 3 increased a less than expected 5k to 333k which had the effect of lowering the 4-week moving average by 6k to 336k. DB’s US economists note that this is the lowest reading since November 17, 2007, before the onset of recession in the following month. Dallas Fed president Richard Fisher, one of the more outspoken and hawkish of Fed officials, said yesterday that Fed representatives seem to be “all singing from the same song book” and that the Fed will dial-back QE if “things go as the FOMC expects”.

US rates were little changed yesterday with 10yr yields closing flat at 2.59%. The US dollar continued to struggle against major currencies yesterday and the dollar index had its longest losing streak (five days) in two months. The euro had another strong day against the USD (+0.3%) amid a higher than expected German trade balance (EUR16.9bn vs 15.0 expected) for June. EURUSD is bumping up against the top of its recent trading range (1.338 as we type).

In other news, ahead of the Bank of England meeting minutes to be released next week, Bloomberg is reporting that the Bank’s MPC held three votes for the first time during their last meeting on August 1st as they debated introducing forward rate guidance. The vote was a one-off and won’t be repeated at every MPC meeting according to an unnamed official cited by Bloomberg.

Turning to the day ahead, the immediate focus will be on the Chinese data. In Europe, dataflow includes French industrial production and Italian/UK trade. Wholesale inventories are the main highlight on the US data calendar.

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Not Even More Fake Chinese Data Can Push Futures Higher

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