Balancing China’s needs

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The big question this morning for markets is whether to meet the latest Chinese GDP data with concern that it was lower than expected, or relief that the economy is slowing in an orderly fashion and will be supported by the largest increase in yuan-lending for a year.

The initial reaction, as suggested by the Aussie’s movement, is that concerns are more about the slower than expected pace of growth, AUD down around 0.5% in the wake of the release. The yen is also the only leader vs. the dollar after the numbers.

Also seen were modestly firmer industrial production numbers for March (11.9% YoY) and retail sales figures, which were in line with expectations at 14.8%. China is juggling a lot of balls right now, trying to slow the economy a little, rebalance it towards consumption, ensure that property prices soften rather than crash and control lending so it does not fuel potential new bubbles. For now, it looks like policy-makers are achieving their goals but it’s a precarious balance.

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Commentary

Monti’s continuing battle. Now that Mario Monti’s ambitious reform agenda has reached the implementation stage, it is little wonder that he is being lambasted from all sides. Bond investors are rattled, major unions are threatening widespread strike action against his reforms and some politicians who previously supported Monti’s efforts are now vacillating under the weight of public protest. Monti will need a hard hat. One of the major unions, CGIL, has called a strike for today in response to his pension reforms. It is also contemplating industrial action once parliament starts to discuss Monti’s controversial labour reforms. The latter has drawn widespread condemnation from employers as well. No one is happy, it seems – the unions are up in arms and the employers are incensed by Monti’s climb-down on regulations allowing them to sack workers for economic reasons without fear of reinstatement. For their part, Monti’s ministers are deeply frustrated as well, having spent no less than two months in close consultation with both the unions and employers, only to be roundly condemned after the process was completed. Who would be a politician? That said, Monti and his cabinet are winning plaudits for their pluck from foreign leaders and international investors, as well as some of the biggest names in Italian commerce. Interestingly, the political landscape in Italy is changing at a rapid rate of knots. The Northern League, a critical member of Silvio Berlusconi’s coalition over recent years, is disintegrating. Umberto Bossi, its leader, has resigned amidst allegations of fraud, money laundering and misuse of funds. Other senior members of his party have also resigned.  Structural change has been essential for Italy. However, as is inevitably the case, rapid change can be deeply unsettling. Unfortunately for Italians, rapid change will be a constant over the next few years.

Housing still a big US headwind. Amidst the optimism regarding the US economy that is reasonably commonplace these days, it is worth highlighting one sector that will continue to represent a headwind for some time to come, namely housing. As highlighted recently in a detailed Reuters article, and separately by RealtyTrac, there is a wave of foreclosures likely to be unleashed on an unsuspecting housing market over the next few quarters because banks are now in a stronger legal position to enforce their security. As such, it could reasonably be argued that there are an extra 1.6m homes to be foreclosed. According to RealtyTrac, those states that use a judicial process to impose foreclosure (26 states in all) experienced an 8% increase in Q1, whereas those states using a non-judicial system recorded a decline of 8%. Some judicial states such as Connecticut, Indiana, Florida and Massachusetts registered increased foreclosure of more than a quarter in Q1. House prices in these judicial states could well come under further downward pressure in the months ahead.  Officially at least, the inventory of unsold homes has halved since the middle of 2010, from twelve months to around six months, which is a six-year low. However, some of this decline is artificial; as foreclosures accelerate this year we can expect this inventory to head higher once more. On a national level, house prices are still declining – the composite measure of twenty major cities compiled by Case-Shiller fell by a further 4% in the year ended January. Should the foreclosure prognostications of RealtyTrac prove to be accurate, then house prices are unlikely to be rising in the US any time soon.

The impending franc attack. The most surprising thing about last week’s crossing of the EUR/CHF 1.20 line last week was that it took so long to happen.  Even though the SNB has downplayed the significance of it, it’s unlikely to be the last battle between the markets and the SNB. Towards the end of October EUR/CHF reached a high of 1.2474.  In contrast, this year the franc has always been within 2% of the 1.20 target, on average trading 0.6% away from it.  But what is more remarkable is that this has happened at a time when markets were supposedly in a ’risk-on’ mood.  During Q1, the S&P was up nearly 12% on the quarter, which is a time when one would have seen pressure on traditional safe-havens. Indeed, this was the case for the yen, although there were also domestic factors at play pushing the currency lower. For now, whilst the SNB in theory stands at 1.20 with unlimited offers of overseas currencies, the impression remains that it’s defending the level with a pea-shooter rather than a bazooka.

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