Chinese Q1 GDP and How it Could Affect the Markets

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Tonight we have the release of a trove of important economic data from China.

But the star of the session is going to be the release of the first quarter GDP figure. Just recently, the IMF adjusted their outlook of global economic growth to the downside, with the notable exception being a revision higher for China. We’ll get to see how that prediction is working out so far, and what that might imply for policy and the markets going forward.

This data dump is the only major economic event on the calendar for the week. So, we could see China-dependent equities, currencies, and commodities setting their tone for the week here. This is, therefore, an event that should be on the radar for any trader!

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Schedule and Expectations.

We can expect all the data to come out at the same time at 04:00 CET (or 22:00 the day before EST.)

And while the focus will be on the GDP number, the others are also capable of muting or exaggerating the market. As such, we could see an uncharacteristic increase in volatility around that time.

Expectations are for retail sales for March to increase 8.4% year over year. This would be a pick up in the pace of growth from the 8.2% annualized registered in February. This figure is adjusted to account for the impact of the lunar new year. And this is why the annualized figure is considered more important for the markets. Retail sales are part of the expectation for the near-term data from China to be an improvement.

Retail sales have been just above 8.1% for the last several months, which accounts for a multi-year low. And the hope is that a move higher would a signal a reversal of the downward trend that has been persistent through all of last year.

Forecasts suggest that industrial production for March will increase by 5.9% annualized. This would also put it above the prior month’s 5.3%. However, the consensus on a positive outlook here isn’t as broad as it is for retail sales, given that a significant portion of Chinese industrial production is for export. Optimistic analysts are pointing to the jump back into expansion that we got from the March PMI. On the other hand, the less optimistic ones (who still expect growth of 4.9%) point to total export values being lower than the average of last year.

Expectations are for fixed asset investment to slightly decrease its expansion to 5.9% from 6.1% last month. This would keep it in line with the trend since the end of the year. A drop in this would put pressure on upcoming GDP expectations.

Regarding the NBS press conference, we get the assessment of the statistics bureau officials after the major release of the data. And it’s likely to have a muted effect because of that.

China Q1 GDP

The consensus of expectations is for the quarterly GDP figure to come in at 1.4%. This would be a decrease from 1.5% in the prior quarter. And this would come out to an annualized 6.3% compared to a 6.4% annualized last time. This compares to the official target of ~6.5% growth for the year and the IMF’s projection of between 6.2-6.3%.

We should note that the Chinese GDP has a seasonal component, with Q1 figures typically coming in the lowest for the year. They then usually jump to the highest of the year in the second quarter. The last couple of years, Q1 has come in at 1.5%.

Yesterday, US Treasury Secretary Steve Mnuchin said that the trade deal was making progress. However, he claimed more work is needed, essentially affirming the condition of the negotiation for the last several weeks.

However, now, some analysts are pointing to the larger risk to China going forward is not the trade deal, so much as the EU slipping into a technical recession. China and the EU trade around a billion dollars a day. A drop in EU demand could be larger than the trade war effect, as many businesses have adapted to the new reality and are returning to growth. This is, of course, provided the analyst expectations of the summary of Q1 data prove accurate.

6.3% would still be interpreted as economic “cooling” and is largely priced into the market. A drop below that could be seen as quite negative, prompting the possibility of further intervention by the Chinese government including the expected RRR cut that was hinted at previously. A better result could buoy markets. But, given that it will reduce the chance of further easing from China, it might have the opposite effect.

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