How to navigate the fog of economic data

3rd November 2015


Rowan Dartington Signature’s Guy Stephens looks at data that really matter for markets in the West…

This week and last week are presenting us with of a lot of important fundamental data on major developed economies, including the US and Europe. This will provide further clues as to whether the markets have spooked themselves over the summer about the impact of the Chinese economic slowdown.

If you recall, the whole period of market panic was sparked by the sharp drop in the stock market and the relaxation of the currency trading bands of the Yuan against the US Dollar in August.

This was choreographed as a move consistent with the longer term desire of the Chinese authorities to allow the currency to float more freely but was met with scepticism by the West as this led to currency weakness benefiting exports, which were known to be flagging.

It was also viewed as a drastic move and therefore led to speculation that the Chinese economy was slowing at a much faster rate than previously thought.  The lack of information and believable official economic data has stoked the fire, and the on-going weakness in commodity markets has only served to confirm the view that Chinese growth is much weaker than previously believed.

Last week’s data from the US economy showed that GDP growth fell from 3.9% in the second quarter to 1.5% in the third.

However, this was the first reading of the usual three and many forecasters are predicting this will get upgraded as more data comes in.  This is one of the principle reasons why commentators have a low level of confidence with the Chinese official figures.

In the West, it takes most of the following quarter for the final GDP figure to be confirmed with the second quarter 3.9% figure above being confirmed (and upgraded from 3.7%) on 25th September 2015.  This is because the US economy is vast and it takes around 3 months for all the data to come in.  Contrast this with the similarly vast Chinese economy with a lower level of technological communication where the third quarter official figure was released on the 19th October and that is it.  Fait accompli!

The official figure is becoming largely academic as time marches on.  What really matters is the effect on those businesses in the West which are potentially exposed to the Chinese slowdown.  We have already seen cautious statements from the likes of Mulberry, LVMH and makers of luxury cars.

We are aware of the obvious effect on demand for construction equipment but as Caterpillar’s result showed recently, the effect was not as bad as feared.  There is, as yet, no obvious impact on consumer electronics as shown by figures from Apple and Samsung which suggest that demand for fashion led consumer technology is unaffected.  Also, MacDonald’s reported strong figures from China in the third quarter along with strong figures generally, so no sign of a retrenching consumer at all, albeit only limited parts of the Chinese economy.

Closer inspection of the Chinese data reveals that whilst manufacturing data is continuing to slow, growth in the services sector is very strong, just what the authorities want to see as they rebalance the economy away from exports towards internal consumption – what a surprise!

However, we need to remain focused on what matters for markets in the West rather than continue to bang the sceptical Chinese drum.  Direct investment in China is very limited for most investment managers. Many quoted businesses are dependent on Western demand and so long as that is robust, then sentiment should move on from the Chinese dimension in time.

Unfortunately, one of the disadvantages of instantaneous information communication is that rumours and concerns lead to caution and, therefore, a self-fulfilling prophecy can result.

It was Thomas Jefferson who quoted ‘knowledge is power’ and much later, Franklin D Roosevelt who said that ‘the only thing we have to fear is fear itself’.  When we have little knowledge regarding the inner workings of the Chinese economy, then paranoia kicks in, followed by fear.

Last week’s weaker US GDP number was down to the stronger Dollar and some inventory reductions as caution has set in.  There was also weakness in oil related sectors due to the hiatus in investment spending as the oil price remains low.  Going forward, the key focus will be US employment and the Fed has also suggested this.

This week sees ISM and PMI data, strong predictors of confidence and GDP in both the US and Europe, along with retail sales, factory orders and the BoE rate decision as well.  Finally, Wednesday sees US Initial jobless claims and Friday sees non-farm payrolls for September, both expected to come in at around 180,000.

Hopefully, November may start to see the economic fog lifting and we can at last look forward to a more positive run up to Christmas.



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