You Will Listen While I Talk About That Data From Japan And China

If I were you – and I’m not, or at least I don’t think so – I wouldn’t read a whole hell of a lot into either the China data or the Japanese GDP data – at least not in isolation.

And not because it doesn’t matter. It does.

But rather because much like the miss on July trade numbers, the Chinese data wasn’t as bad as it could have been under the circumstances and we were coming off pretty robust June numbers. China’s economy is slowing down. And it’s probably going to slow down some more in H2. The stronger currency isn’t helping and neither is the push to de-risk the system by reining in speculation and leverage (trying to target that effort so it only affects speculation and doesn’t choke off credit to the real economy is a difficult balancing act).

But this is a politically sensitive year for Beijing. It seems exceedingly unlikely that they’re going to allow the bottom to completely fall out if they can help it. And this isn’t the bottom falling out:

Here’s what I mean, as articulated by Goldman:

Although July growth was much weaker than June and also below our expectation (which already built in a deceleration from June), the combined sequential growth of IP in the two months is still at a firm level of about 10% annualized. Part of the volatility in the past two months came from the volatility in exports growth. Part of the volatility came from policy stance which had been supportive in Q2 especially in terms of fiscal expenditure. The second-quarter data, especially the GDP reading, were particularly important because they were potentially the last quarterly reading on the economy before the start of the Party Congress (which can be held anytime from September till November). We expect the “policy put” to prevent an excessive slowdown to stay at least before and during the party congress.

And here’s Credit Suisse:

We don’t expect growth to fall sharply in the short term because China is in a politically sensitive year. Stability is of utmost importance.

So if anything, you might see the PBoC move to put the brakes on any further yuan appreciation and you likely won’t see any dramatic near-term moves to tighten across the board. Obviously, Chinese equities are unconcerned as the SHCOMP logged a solid gain (after a rough patch amid the global risk-off mood last week):

Meanwhile the ChiNext was up 3% because after all, it’s a “bargain”:

lol. ChiNext trades at 38x P/E

believe it or not, that's almost a record *low*

— Heisenberg Report (@heisenbergrpt) August 14, 2017

As far as Japan goes, the GDP print was obviously a blockbuster (4% annualized, six straight quarters of growth, business spending 2.4% vs 1.2% est; private consumption 0.9% vs 0.5% est. etc.), but I wonder if this isn’t a “good news is bad news” type of thing for risk assets.

Here’s the granular breakdown:

That’s probably good news for an embattled Abe, but it also might put the brakes on stimulus plans and could well make the BoJ feel a little more comfortable in not accelerating the easing push any further. Indeed, one has to think that that kind of growth (i.e. fueled in part by domestic demand) might even be seen as a sign that the economy is more resilient than one might have imagined in the face of a yen that’s subject to episodic bouts of haven buying amid worsening geopolitical tensions.

But remember, inflation is still M.I.A. So I guess this is another one of those “who you gonna believe” econ moments that are commonplace in the post-crisis, disinflationary regime.

The problem for risk assets in that scenario is that if people start to get the idea that policy makers are leaning towards believing the data that’s sending more positive signals (as opposed to tilting at the deflation windmill with still more money printing), well then traders and investors will start to try and frontrun an expected withdrawal of stimulus.

And although we can’t interpret much from today’s action because Japan is catching up from a long weekend, do note that Japanese stocks fell sharply on Monday even as the yen headed for its first decline in a week.