The main story today is the China data reported that was pretty much in line with expectations. Growth in Q4 magically grew by 6% y/o/y, the same pace as in Q3 but which is the slowest since at least the early 1990’s. For all of 2019, growth was 6.1% with consumption making up just below 60% of it. The data for December specifically was this: Retail Sales up 8% y/o/y vs the est of 7.9%, IP was higher by 6.9% vs the est of 5.9% and fixed asset investment ytd was up by 5.4% vs the est of 5.2%. How much of the December data was a timing thing because the Lunar New Year holiday is earlier this year than last is unknown. How much was stimulated by monetary and fiscal initiatives vs organic growth is unknown. How much growth will inflect higher, it at all, upon a trade deal but with still almost all of the tariffs still in place, we’ll soon see.
The market response was mixed as the Shanghai comp was unchanged but the H share index was higher by .8% and European stocks are rallying too. Copper is up by .8% too. On the other hand, global bond yields are not budging.
With respect to the sharp move higher in the S&P 500 and the persistent bid to the 10 yr note, here is a chart between the two with the SPX in white and 10 yr yield in orange. Sometimes they are correlated, sometimes they are not. How much the Fed is the main influence here is always the debate. When QE4 ends, we’ll get a good test.
I’ve said for a while that one of the more important earnings releases, and very unsung, is from Fastenal. This is an amazing company that has had decades of success but is right in the middle of the manufacturing and construction sectors so is always a good tell. They slightly missed the revenue estimate but met the eps forecast and said this in their press release: “The general slowing in economic activity that we experienced in the 2nd and 3rd quarters of 2019 continued in the 4th quarter of 2019. This general softness was exacerbated in December by holiday timing and longer than usual year end plant shutdowns. A lesser contributor to our sales growth in the 4th quarter of 2019 was higher product pricing as a result of increases implemented in late 2019 and throughout 2019 to mitigate the impacts of general and tariff related inflation in the marketplace.”
Keep an eye on JBHT today too as they missed both top and bottom line and as a trucking/transportation company, they are also at the heart of the manufacturing sector as a service company.
Singapore, a great proxy for global trade, saw its December non oil exports rise 2.4% y/o/y, above the estimate of -1% driven by a 35% spike in pharma shipments. Exports of electronic products fell 21%. This y/o/y gain in exports follows 9 months in a row of declines. While the headline figure provides hope that things are stabilizing, that it was driven by non economically sensitive pharma products and we saw another huge decline in tech, we can’t breathe a sigh of relief just yet.
At the same time the Bank of England is seemingly on the cusp of cutting rates from an already low rate of .75% without even giving Brexit a chance now that it is upon us, the Bank of Korea left rates unchanged at 1.25% as expected. It’s amazing how much more reserved emerging market central banks have been over the past 10 years vs the developed ones like the Fed, ECB, BoE and BoJ. The developed central banks ended up being the ones that have behaved like Banana Republic institutions with all the money printing and negative and zero rates.
In the UK, December retail sales were soft, falling .8% m/o/m, well below the estimate of up .8%. In response, we’re seeing another drop in the 2 yr gilt yield. Any responsible central banker would wait to see how growth moves from here with the resounding election vote for Boris Johnson, hopes that Brexit is finally here and can be handled this year and with a US/China trade deal. There is now a 72% chance of a rate cut priced in for the January 30th meeting.