Yesterday we brought attention to China's overheating economy. In response, Deutsche Bank analyst Michael Spencer is now estimating an earlier than expected rate hike for the newly-minted second largest world economy. "We think January CPI inflation will be similar to December, but in February inflation could rise to 2.5%, above the 2.25% benchmark deposit rate. This implies some likelihood of the first rate hike coming in the second half of March, earlier than our current expectation of an April rate hike." Just look at China markets at what tightening means for equities. Then extrapolate to the U.S., once Bernanke someday wakes up on the right side of the bed and realizes that America is in a very much comparable situation (although 10.7% GDP growth would be something even Obama would have some problems with digesting). And now that Volcker is finally about to supplant the soon to be defunct Larry Summers as Obama's key financial advisor, one can extend Deutsche's conclusion and say that the rate hike in the U.S. may also come earlier than expected.
Full D.B. note:
China released Q4 GDP and a number of key economic indicators for December. Overall, the data show a rapid rise in inflation, a significant deceleration in FAI growth, and some acceleration in consumer spending.
GDP: Q4 GDP came in at 10.7%yoy, slightly higher than our forecast of 10.5%. This is not a big surprise. For 2009 as a whole GDP growth reached 8.7%, higher than our and market forecasts of 8.4-8.5%, partly because the Statistical Bureau also raised the GDP growth numbers of the earlier quarters of 2009. For 2010, we see some upside to our annual GDP growth forecast (currently at 9%), largely reflecting the very strong export momentum. We expect export growth to surge to 30% yoy in Q2 this year from December's 18%.
Inflation: December CPI surged to 1.9% yoy, slightly lower than our 2.1% forecast but much higher than the market consensus of 1.4%. It was driven mainly by food prices last month. But going forward, the money supply-CPI transmission will be the major driver of inflation. We think January CPI inflation will be similar to December, but in February inflation could rise to 2.5%, above the 2.25% benchmark deposit rate. This implies some likelihood of the first rate hike coming in the second half of March, earlier than our current expectation of an April rate hike. December PPI was up 1.7% yoy, similar to our forecast but much higher than consensus of 0.8%. This is another reason (cost push) that will add to CPI inflation pressure going forward.
FAI: Urban FAI growth slowed further to 30.5% in Jan-Dec from 32.1%. This suggests that December single month FAI growth decelerated sharply to only 20% yoy from November’s 24% and the peak of 39% in May. The main reason is the slowdown of yoy growth in government-sponsored FAI in the infrastructure sector such as railway and highways. These figures confirm our view that FAI is decelerating, which together with macro tightening and last year’s inventory increases, suggests a cautious near term outlook for raw materials such as steel and copper.
Consumption: December retail sales growth was a higher-than-expected 17.5% yoy (vs consensus of 16.3%), reflecting stronger than expected inflation and probably some underlying improvement in the real growth rate. We thus see upside to our annual retail sales forecast for 2010. We would not be surprised to see 17% retail sales growth this year, vs our current forecast of 15.5%.
Market implications: due to the front-loaded inflationary pressure, monetary tightening possibly coming earlier than expected, which will cap market sentiment on construction materials, banks, and properties in the near term. FAI deceleration is another negative for construction related names in the short term. Retail acceleration and inflation uptrend are broadly positive or consumption. Exports, consumption, equipment manufacturing, insurance, and agriculture are safe heaven at this moment, in our view.