Daily Insight
Group Economics Macro & Financial Markets Research Nick Kounis, Arjen van Dijkhuizen & Aline
The Fed-China sandwich
Schuiling, +31 20 343 5616
15 September 2015
Markets mixed reflecting cross-currents of China concerns and Fed optimism China’s August data point to stabilisation of growth, but below 7% target - we expect more stimulus Eurozone’s resilience continues, as industrial sector starts Q3 on a strong note Official GDP figures versus Bloomberg estimates
Optimism that the Fed will hold vs. soft China data
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Financial markets saw a distinctly mixed session against the background of rather lackluster China data (see below), and
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optimism that the Fed would stand pat. China equities closed
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down and commodity prices were soft, partly reflecting the weak economic reports. On the other hand, emerging market
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equities overall were slightly up on optimism that the Federal
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Reserve would hold fire and keep its policy rate on hold later 6
this week. This view also supported Treasuries. Although economists are split on whether the Fed will raise its policy
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rate, financial market pricing implies only around a 30%
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on hold until the December FOMC. China’s activity data for August: quite a mixed bag The August data published last weekend were a mixed bag. Fixed investment slowed to a 15-year low of 10.9% yoy (July: 11.2%). Industrial production rose marginally to 6.1% yoy (July: 6.0%), which was below consensus (6.5%) as markets had discounted for the low base. Meanwhile, retail sales growth rose to a seven-month high of 10.8% yoy (July: 10.5%). This suggests that the stock market rout has had a limited effect on consumption so far. Still, Chinese retail sales also capture some part of government consumption, whereas consumption of services is not fully included in the number.
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Real GDP growth (official)
change of a move. Our own base case is that the Fed will stay
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Bloomberg GDP estimate
Source: Thomson Reuters Datastream
Eurozone’s industrial sector expanding Industrial production in the eurozone was stronger than expected in July. It rose by 0.6% mom following two consecutive declines of 0.2% and 0.3% in May and June, respectively. Although the risks for the eurozone industrial sector are to the downside given the slowdown in China and emerging markets more generally, we do not expect a sharp deterioration in the sector. Domestic demand in the eurozone is growing robustly, while exports and production will also benefit from strong demand from the other EU countries and the US and the depreciation of the euro during the past year.
Further stimulus likely to keep growth close to target Previously released number showed trade remained weak, CPI rose thanks to higher food prices and PPI fell deeper into deflation. Aggregate financing picked up, while new bank loans slowed. All in all, overall growth momentum seems to have
The eurozone’s manufacturing PMI for August and its orders component both point in the direction of ongoing moderate expansion in the eurozone’s industrial sector. Combined with continued growth in the services sector (its PMI came out at 54.4 in August) and healthy consumption growth (retail sales
stabilised in August. Bloomberg’s GDP estimate came in at
were up by 0.4% mom in July), this makes us quite
6.6%, similar to July’s level. With economic growth likely
comfortable about our forecast that GDP will expand by around
hovering somewhat below the 7% target, we expect more stimulus to come. For the remainder of this year, we have penciled in another 25 bp policy rate cut and 50 bps in RRR cuts and we expect ongoing fiscal stimulus (mainly infrastructure spending) as well.
0.5% in Q3. .