Overnight data released from China demonstrated activity growth data held up strongly in December, despite mixed PMI data. The implied pace of growth in December (month-on-month annualized, seasonally adjusted) was at a similar level to that in November and well above target. The fall in year over year growth was because of an exceptionally high base. The fall in Fixed Asset Investment growth towards the end of the year is a regular phenomenon which is unlikely a reflection of economic fundamentals. Hence the changes in the growth rates of its components need to be treated carefully. The fall in retail sales growth rate was likely due to normalization after the strong boost from the November 11 online sale which has become increasingly influential in recent years.
The government can now claim victory as the 6.9% GDP data reported is consistent with the “around 7%” growth target for 2015. 4Q GDP growth was boosted by stronger secondary growth. Tertiary industry quarter over quarter growth held up, partially helped by the equity market rebound (the recent downturn started since the start of 2016). As the government has achieved the growth target for the past year, we are likely to see a relaxation of cyclical policy stimulus. Policy focus instead will probably shift to financial market stability in terms of both equity and FX markets as well as structural reforms. This is a key reason, besides the modest upside surprise in CPI inflation in 4Q, among others, for the lack of cyclical loosening measures such as interest rate and RRR cuts. Markets expect this tendency to continue in the near term until there are renewed signs of stress in activity growth, financial markets, or substantially lower CPI inflation. One possible exception may be property-related policies as property related data were still quite weak.
As a main driver of stronger growth in part of the recovery was the front loading of fiscal expenditure in 4Q (to October/November from December previously). 1Q growth will likely receive less support from fiscal policy because of smaller lagged effects. Only if the government takes proactive action to front load this year’s fiscal expenditure, will there be an offset to this, but there is no concrete evidence of this happening so far. Together with the likely less aggressive administrative support for growth, this is likely to lead to another round of slowdown in sequential growth.
In recent years, the growth target has been lowered from 8%, but contrary to prior expectations, achieving the new lower target often proved to be much more difficult than expected. Markets expect similar challenges this year, despite a growth target that is likely to be 6.5% (this will only be confirmed during the NPC next March); markets are forecasting 6.4% GDP growth. Alternative measures of activity have been tracking somewhat weaker (in the neighborhood of 5%), but in light of the difficulties facing the global economy, this level of growth is still very respectable. Any significant deviation of growth from the target (in either direction) will almost surely be met with relatively timely cyclical policy adjustments
The leadership has put a lot of emphasis on long-term structural reform, but the evidence of actual changes in the ground is not yet clear-cut. The rotation towards consumption and services is still in very early stages. Although strong Yuan TWI appreciation in recent years might have been expected to reduce the contribution of net exports, weak domestic demand slowed imports significantly, keeping the surplus large. Despite the strong rhetoric from the leadership on structural reform under the new term supply side reform, it is not always easy to let market forces determine resource allocation (as noted in the 3rd Plenum) and reduce corporate cost burden, when one considers other goals such as managing environmental damages and energy security. A recent example is the decision by the National Development and Reform Commission to freeze refined oil price once international oil price fell below 40 USD. As a result markets expect 2016 to be another year of gradual structural reform (though maybe modestly faster than last year) and bumpy deceleration.
Technical Trading Takeaway
The weekly chart has a bullish structure, since breaking through the topside of the projected ascending channel, I have overlaid a further bullish channel as highlighted in the chart above. This suggests scope for a pullback to test the spike highs printed in August 2015 .6.4486which coincides with the projects ascending trend line support of the new bullish channel and also a retest of the prior trend line resistance to now act as potential support. It is from a successful retest of this level that I would venture long for the next leg higher which initially targets a test of 6.700
Open Emerging Market FX Trades
Long USDINR 65.25. First Target Achieved at 66.85, stay long to target a retest and break of 2015 highs next. Moving trialing stops up to recent weekly swing lows to lock in gains while allowing the trade sufficient room to extend to next target as per chart below.
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