Weekly Commentary from Goldman Sachs
Suddenly, there are some signs of life creeping out besides those in the US, where such signs have been present for a while. In the UK, I picked up various anecdotes in addition to the better published data and, in this last week, there has been much evidence to support the ‘soft landing’ and ‘better quality’ life of China. If we could think of a world without Japan and the Eurozone, life this week would be so much better. Anyhow…
China – How Good Are Chinese Policymakers?
If China were a football team, you might want to support them and/or wear their replica shirts. After months of debate about a ‘soft’ or ‘hard landing’, the data published since last Friday is very supportive of the optimists’ view. Here’s the list; M2 money supply growth accelerated to 14.8% in September (and as a result the Chinese Financial Conditions Index (FCI) is easing, a positive sign for future growth), the trade balance came in at a high $27.7bn with exports stronger than expected at 9.9%. While we should want China to export less and import more, in terms of the cycle, we don’t want them to export nothing. And before readers jump to the conclusion that this is the ‘wrong sort of growth’, in the nine months to September, the trade surplus is around $150bn or about 2.5% of GDP. This is a quarter of its levels pre-2008.
Chinese CPI rose by 1.9% year-on-year in September, significantly below the PBOC’s 4% 2012 target. The 3.6% decline in PPI suggests that near-term future inflation is not a risk. Inflation will probably ease further which, amongst other things, will continue to boost real Chinese income growth.
Chinese GDP for Q3 rose 7.4% year-on-year, in line with expectations, with statisticians stating that quarterly momentum was higher than expected at 2.2%. For the first nine months of 2012, GDP has risen 7.7% and Premier Wen said it looks as though China will easily meet their 7.5% ‘target’ for 2012. In fact, they will probably exceed it slightly. Not bad, eh?
To top off a good week for Chinese data, industrial production rose a better than expected 9.2%, up from 8.9%. Most importantly, retail sales rose by a much stronger than expected 14.2% which, given subdued CPI, translates into a healthy acceleration of real retail sales, a sign of rising consumer spending. As I’ve said before, every month I look to the relative performance of retail sales to industrial production (see chart) as a guide to Chinese economic rebalancing, along with the trend of the trade balance.
So, let’s reflect a little. Chinese GDP growth for 2012 will probably come in now at 7.7% to 7.8%, just above Premier Wen’s 7.5%. After 9.2% growth in 2011, the first two years of the decade are averaging 8.5%. We have assumed 7.1% growth for the decade. This currently seems very doable. Moreover, China has slowed to this pace from its previous three-decade average of 10.25%. With a trade surplus a quarter below its peak, stabilised housing prices, consumption rising as a share of GDP, and inflation below target, the situation looks good. While so many waste time wondering and worrying about whether any of the data is accurate, I find myself this week wondering whether China is managed by Sir Alex Ferguson?
I must have written this at least ten times: Chinese economic data is of course questionable, but so is everybody else’s. China’s data is certainly no worse than that of the UK. As with every country, you have to corroborate data with that from elsewhere and international companies’ business. In addition, GS Proprietary China Activity Index is suggesting momentum between 6% to 8%. That is good enough for me.
A Pick Up In Global Momentum.
The GS October Global Leading Indicator (GLI) itched out a tiny rise in momentum of 0.09%, the first and welcome positive change since December 2011. Against a background of very easy OECD financial conditions, which in oil-adjusted terms, have eased even more recently, this change suggests more reasons for optimism in my view. There are probably some banana skins out there, but as we discussed in this week’s GSAM CIO call, we are not sure that they are the frequently discussed ones.
The US Creeping Better.
After another week of rather spectacular housing data in the US, with starts showing a bumper 15% rise, some are tempted to raise their 2013 GDP forecasts despite the fiscal cliff issues. Our own yearly GSAM call for 2013 has been above consensus at 2.5%, and we wonder when some of the sell-side will join us. At what could turn out to have been a too-bullish chat about this topic at our CIO call, one of our senior portfolio managers compared the mass worrying about the fiscal cliff to Y2K fears at end of 1999. If indeed there is an early deal either to resolve the fiscal impasse or, perhaps more likely, to kick the can down the road, it is quite possible that some private sector animal spirits will be lifted. If so, early 2013 GDP growth will likely be a positive surprise. Of course, the big jump back in weekly jobs claims and the modest improvement in the Philly Fed Survey show we need to keep a balance about things, but it does feel that a bit of Washington compromising would be very helpful. I am going to be in DC briefly next week, and it will be interesting to hear the buzz on this and other topics.
On top of housing, the other big bullish factor for the US remains the domestic energy story. The FT had a couple of interesting reports this week highlighting the dramatic change going on. Friday’s edition had a great story about the remarkable developments in Williston, North Dakota, a town at the centre of the shale boom. This followed a piece from Thursday entitled “Oil trade in the throes of historic shift”, which included fantastic stories about the shifting role of Corpus Christi, the Texas port, and the changing patterns of world oil exports and imports. I increasingly believe oil prices have peaked for a few years, and I notice a few sell-side researchers changing their views of the likely ‘equilibrium’ oil price. Those evidence-based stories from the real world in the media are so much more valuable then journalists’ often weary, and usually negative, view on life.
The UK Life?
Next week sees the release of Q3 GDP with widespread hopes of a significant bounce and some people thinking a quarterly bounce of as much as 1% is possible. Given the track record of the ONS to deliver frequent curve balls, this is possibly dangerous, but we should get quite a lift just from less holidays, etc as well as some punchy data in the quarter. Last week’s positive retail sales and, yet another, much better employment report than expected, support this mood. In addition to this official data, suddenly the mood I encounter when I travel around town and beyond is lifted also. A couple of London cab drivers told me this week that the city seems to have found a few thousand more people out and about. A small business investor I know confirmed that what I had witnessed in my own South West London neighbourhood seems to be happening elsewhere: for some reason, there are less empty shops. More retail businesses seem to be opening in the suburbs of London. In a meeting with some people from Manchester, I even heard some talk about a stirring in the textile industry, which really would be quite a story! I had been thinking of writing a bit about the decision to agree the wording for Scotland’s 2014 referendum on leaving the UK, but this can wait for another time.
Other Bits and Pieces.
The Eurozone passed through another week with no notable new disaster, and most interestingly a major drop in Spanish 10-year bond yields which seems to reflect a view that at some point, it is a done deal, Spanish bonds will get official ECB support. Of course, the more their yields drop, the less the need. However, the degree of shift in yields without good news simply confirms my view that the summer ‘Draghi Moment’ shifted the risk-return profile for investment managers. At a minimum, the Euro area issues are not likely to be contagious enough to affect the rest of the world. Buying European bonds on sell-offs now seems much more appealing than selling them on rallies, as it should have done since July.
Elsewhere, my old colleague from GS Economics, Tushar Poddar, has written a Global Paper (no. 216) titled “Why India should introduce an Inflation Target”. This is something I have been recommending to Indian policymakers for years, and if they have the foresight to now do this, it would be an excellent decision and very credibility-enhancing. We can only hope – aim higher!
Looking ahead, the October 30th Bank of Japan monetary policy meeting looms as a big day in my mind. This has the potential to unlock aspects of the growing challenges facing Japan and its ‘happy depression,’ as I have liked to think about it for the best part of the past 20 years.
Meanwhile, Sir Alex, we need a bit of that Chinese-style magic at Old Trafford with some bigger games about to appear.