It has been a quiet session overnight (and that will continue until the Germans come back from vacation) punctuated by Mario Draghi's attempt to jawbone the market into submission again, this time following the release of the ECB monthly report in which it basically regurgitated Draghi's still misunderstood speech in it said it may buy bonds if strict conditionality is ensured, the same conditionality that Spain said it would not comply with, yet which European bond traders continue to misunderstand, because Spain will not request a bailout as long as its 10 Years are trading below 8% yield. Of course, nobody wants to sell first, until the selling actually begins. Then it will be waterfall. In other news Greek industrial production rose by a tiny amount from below sea level, rising by 0.3% in June following a 2.9% decline previously. This however must be due to the Greek workers' enhanced efficiency - Greek unemployment just rose yet again to the mindblowing 23.1%, from 22.6% - a new all time high (with youth unemployment just 45% away from 100%). And so the race between Spain and Greece over who can hit 50% unemployment first continues. Another notable economic milestone was crossed after the IFO institute euro-area economic climate indicator declined for first time this year, pushing the EURUSD to just above 1.2300. There were also more bad news from the UK whose trade deficit widened more than expected hitting GBP10.1 billion vs GBP8.7 billion estimated, with a record GBP28.3 billion good deficit, led by oil, cars and chemicals. In other news the European collapse continues unabated, yet the market which has long been nothing but a central bank policy tool and no longer discounts anything is perfectly oblivious to what is happening. There was one notable final change: the Chinese economy accelerated its own deterioration, and this time, courtesy of the specter of soaring food prices and a CPI print above estimates, it is very much powerless to even threaten with more easing.
China's July activity data came in weaker than expected across the board
Industrial production decelerated further to 9.2% yoy and nominal retail sales growth stepped down to 13.1% yoy, both much below expectations. Total fixed asset investment growth remained at 20.4% yoy year-to-date, but the yoy rate for the single month of July slowed by 0.7ppt from the 21.1% in June.
The property sector continued to exert downward pressure on overall growth momentum. Despite the impressive rebound in housing sales (in volume terms, +13% yoy in July vs -3.3% yoy in June), property investment growth dropped below +10% yoy, within which investment in residential projects was up only 4.8% yoy in July. Moreover, total new starts declined 26.7% yoy in July and residential new starts contracted 30.4% yoy. The base effect was one of the factors contributing to such a sharp decline, but the trend since Q1 has been unambiguously sluggish.
Infrastructure investment did pick up, but was still too modest to offset the drag from the housing sector. Railway FAI growth recovered to -6.6% yoy in July from -21.5% yoy in June and highway FAI growth rebounded to +8.5% yoy from -6.9% yoy. This trend is set to persist in the coming months, with the help of credit expansion and acceleration in bond issuance.
We have been arguing that Beijing is unwilling to repeat the investment stimulus of 2009/10 and that a moderate boost to infrastructural investment without a relaxation in property policies will not be enough to lift overall growth substantially. Today's data reconfirms our view. And, unfortunately, the bottoming-out seems to be taking even longer than we initially anticipated.
Clearly, the easing policies announced so far have not fully passed through to the real economy. The central government's determination to cap property prices will continue to obstruct its push for public investment. We think the PBoC's options could be even more limited if food inflation continues from here onwards. We see the most likely action from the PBoC as further liquidity easing via reverse repo and required reserve ratio cuts, alongside increased bank lending. We continue to look for a 50bp RRR cut in August.
Given today's data and expectations for further incremental easing, we revise down our forecast for Q3 GDP growth from 8% yoy to 7.7% yoy, but our Q4 call for 8% yoy remains unchanged. This revision reduces our full-year growth forecast to 7.8% from 7.9%.
In other words, the economy of the entire world is rapidly deteriorating. But at least futures are up at last check.