UPDATE: Abenomics double #fail - Japanese Base Labor Earnings dropped YoY for the 21st straight month...
Another night, another disaster for Abe. Japan's all-important Tankan Business conditions forecast dropped to a one-year low and missed by the most since Lehman (but apart from that Abenomics is "nailing it"). China's "official" Manufacturing PMI beat expectations modestly and printed at a stimulus-busting 50.3 (expanding) as imports and new export orders jumped rather cough-notably-cough given external conditions and all other economic data. Rather remarkably, the New Order sub index of the Steel Industry PMI report showed a huge surge from 32.4 to 46.1 as New Export orders tumbled - this is the biggest jump in new Steel orders in.. well as far back as we have data...Then HSBC's PMI hit. Printing at 48.0 - worse than the flash print at 48.1 and still firmly in contraction territory leaving China once again in Schrodinger baffle 'em with bullshit economic growth mode.
Japan's Tankan Large Enterprise Busines Outlook Survey is losing its hope...
Then China followed up with the ubiquitous Schrodinger economy with the official PMI data beating expectations and showing an improved expansion while HSBC's manufacturing PMI (broader-based survey of less SOEs) remained firmly in contraction territory... and worse than the Flash data!!
So HSBC lowest in 8 months and missed and Official highest in 3 months and beat - Stimulus or no?
And aside from in the inflationary pressure in Japan, data is a disaster and stimulus hopes are renewed as terrible news is great news... And don't worry about the JGBs dumping on inflation concerns...
- *ASO: JGB YIELDS WON'T JUMP BECAUSE OF HIGH QUALITY OF BONDS
And China stimulus hopes appear dashed for now with official stats showing "improvement"...
Day after day Japanese data has been missing expectations (and is dismissed as the storm before the calm), US data has been missing expectations (all the weather, don't worry), and European data has flatlined for 5 months (amid calls for a great recovery or new QE). But, what is keeping the dream alive for stock investors all over the world is another region that is expressly set on tightening credit and instilling "moral hazard destroying" reforms. One look at the following chart of China's macro data (at 5 year lows) and the howls of optimism will grow loud as stimulus must come any minute, right?... except, as we noted previously, it won't (unless things get a lot worse).
Just how bad is China?
We suspect, for Xi and his merry men, this bad news will remain bad news as any retracement on their promised reforms so soon after the Plenum would be a disaster and would risk an even bigger correction down the road (a lesson they are learning from the Americans very well).
BofA believes that there are structural and cyclical factors at play in China's weakness and that the authorities will be more inclined to deal with the cyclical than the structural for now - the contractionary fiscal drag of the anti-corruption reform.
We believe the major drag is the contractionary fiscal policy as a consequence of Beijing's anti-corruption and anti-vice campaign which was started at the beginning of last year and was significantly escalated this year. The strong evidence was the abnormally high growth of bank deposits of governments and quasi-government agencies (up 28.3% and 23.6% yoy in February 2014 respectively), a significant slowdown in retail sales growth, and some deceleration in FAI growth.
We believe China should continue its anti-corruption campaign and should even take further long-term institution-building measures to more effectively prevent corruption. But the government, just like all other governments in the world, also holds the responsibility in delivering stable growth and full employment in the short-term. How can Beijing reconcile the innate conflicts between the anti-corruption campaign and stable economic growth? In our view, Beijing could reverse the contractionary fiscal policy to some extent by spending the extra government savings on social welfare projects such as social housing, health care, urban infrastructure and infrastructure projects in Western areas.
To be sure, we don't expect a big fiscal stimulus
Our discussions above do not mean that we expect a big stimulus. Actually we think the government needs to recognize the major factors behind the economic slowdown and could come up with appropriate offsetting measures to arrest the slowdown (at least the cyclical part). Unlike the case in the US in 2013, it's hard to measure the exact scale of China's "fiscal cliff", but we can at least get a rough estimate (around 60-150bp, in our view), the cyclical slowdown now is quite clear, and Beijing can experiment with some incremental spending from its own coffers to boost both demand and confidence.
Looking beyond the technical drivers, we expect PBOC will keep liquidity relatively ample and stabilize interbank rates to support growth and smooth corporate financing costs. In terms of RRR, we believe the PBoC will eventually cut the too high RRR, but at the moment we think the chance for a cut is still low.