Intraday Market Thoughts

Fed Flustered, China in the Crosshairs

by Adam Button
Apr 14, 2016 22:56

Another disappointing US inflation report undermined Fed expectations to hike rates twice this year. The Australian dollar was the top performer while the kiwi lagged on divergences after the Aussie employment data. A big major of Chinese economic data is due next, including GDP. A new Premium trade in the Aussie was added 10 mins after those Aussie jobs figures. Below is the latest Premium Video on equity indices - is the 2008Parallel still valid?

Fed Flustered, China in the Crosshairs - Videosnapshot Apr 14 (Chart 1)

The Fed model says rising employment will add to disposable income, drive up prices and push wages higher on competition for workers. It's classic economics but it hasn't unfolded. US CPI rose just 0.9% y/y compared to 1.1% expected in March.

A more convincing model is that real wages haven't risen in a generation and are capped by offshoring and automation. The rise in consumer spending was fueled by credit, not a rising economy where the gains were unevenly distributed.

At some point the Fed will need to reconsider the model but in 7 years we haven't seen any evidence of it. Instead, the Fed complains about disappointing consumer spending and inflation then pushes out the recovery and rates hikes another month.

The market struggled to grasp a theme on the day. The US dollar fell 20-50 pips across the board on the CPI headlines but in another sign of USD resilience, it recovered all the losses in the following hours in a rebound underscores the lack of real alternatives in a world where no one is hiking.

Gold would normally rally on anything bad for the dollar or central banks but it sank $17 on Thursday. All the dovish talk and USD weakness over the past two months was some of the best possible news for gold but it hasn't been able to take advantage. That's worrisome and a head and shoulders top is beginning to unfold on the chart.

The wildcard in the global economy remains China. The PBOC's Yi was on the wires and said he was 'pretty confident' in 6.5-6.7% growth, citing robust data and electricity consumption. Other officials dismissed worries about the SME debt load.

The China bears were put at bay by this week's export data and the slow recovery in Shanghai stocks has largely gone unnoticed. The focus in the hours ahead will be data with the first look at China Q1 GDP due at 0200 GMT. The consensus is 6.7% y/y and YTD growth. A stumble – even a tick or two – could lead to a wobbly in risk assets in the day ahead.

Keep a close eye on the accompanying data as well. Retail sales are expected up 10.4% y/y in March. Industrial production is forecast to rise 5.9% y/y.

Act Exp Prev GMT
Retail Sales (MAR) (y/y)
10.40% 10.12% Apr 15 2:00
Industrial Production (MAR) (m/m)
0.1% -0.5% Apr 15 13:15
Industrial Production (FEB) (y/y)
5.9% 5.4% Apr 15 2:00

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