China's Trade Surplus Dropped 50% in February

Daily Analysis - 08/03/2016

China's February Trade Surplus Nearly Halves From Prior Month

Economic indicators are making more obvious the transition of the Chinese economy from an export oriented economy towards more a domestic services emphasis. Exports slid drastically in February, reflecting declining manufacturing with the surplus potentially headed into negative territory during the current year.

Oil Prices on the Rebound - Brent Above $41

Crude oil benchmarks broke out above key resistance levels, with prices rallying at the fastest rate of 2016. Brent crude topped a price of $41.04 whereas West Texas Intermediate peaked at $38.09. The summation of the National People’s Congress in China over the past weekend has seen policymakers adjust their expectations on future energy consumption, with the Congress announcing plans to cap its energy use by 2020. This however could prove bearish, especially in a market that remains heavily oversupplied. Despite production reductions and demand slightly rising alongside the latest report from Baker Hughes citing the oil rig count at the lowest since 2009, no planned output cuts across major global producers mean that the decline in oil prices might not yet be over. Even though some are calling the latest lows the bottom, prices could once again test these multi-year lows.

Chinese Feeling Pinch of Global Slowdown

The world’s second largest economy’s is feeling the negative effects of the global economic slowdown on its exports with external trade continuing to falter. China’s National Bureau of Statistics reported that the trade surplus for the month of February fell more than expected. The figure came in at $32.59 billion, falling to nearly half of the prior month’s value of $63.29 billion while also missing expectations of $50.15 billion. The report indicated a sustained collapse in both exports and imports. Exports posted the biggest declines since May 2009, mirroring worsening demand conditions, both in the domestic economy and abroad. Stocks reflected the gloomy data with the Shanghai Composite erasing its gains over the last 6 days. The offshore Chinese Yuan weakened at the time of the report, falling to as low as 6.5139 versus the US dollar.

Japanese GDP Improves Over Preliminary Results

Japan’s Gross Domestic Product contracted less than preliminary indications of -1.40% for the final quarter of 2015. The Japanese Cabinet Office reported annualized GDP at -1.10% for the final quarter, missing expectations of -1.50%. On a quarterly basis, GDP also showed marginally better results for the final quarter, with the government reporting a contraction of -0.30% compared to -0.40% seen initially. The country’s economy is still overshadowed by the slowdown in neighboring China, adding pressure to act on the Bank of Japan. The move into negative rate territory in order to help spur devaluation and boost household spending has so far shown limited impact. Fundamental economic indicators remain weak and the government or central bank will likely be forced to provide new stimulus. The main source of weakness indicated by the report was due to falling consumption, matching forecasts from both the IMF and the OECD.

Italy Producer Prices Remain in Deflation

The third largest economy in the Euro Area reported producer price inflation contracting for an 8^th consecutive month in January. The Italian National Institute of Statistics reported the monthly Producer Price Index (PPI) shrinking by -0.70%, down from December’s revised -0.60%. On an annualized basis, producer prices remained firmly in deflationary territory, marking only slight progress and minor improvement compared to December’s revised data of -3.20% to -2.50% in January. The European Statistics Office reported a reduction in PPI across the aggregate Euro Area in the previous week, reflecting continued price softness across the energy sector. The fears of a prolonged slowdown and potential to slip back into deflation has raised the possibility of imminent action by European Central Bank President Mario Draghi. Expectations are for the Governing Council to opt for more easing measures to be implemented in an announcement following Thursday’s monetary policy meeting in Frankfurt.