Chinese GDP Comes in Higher Than Forecast

Daily Analysis - 15/07/2016

Downbeat Growth Expectations Beat to the Upside as Expansion Stabilizes

After forecasting another growth deceleration, market participants were taken by surprise after annualized Chinese GDP managed to beat expectations, printing at 6.70% and matching the prior quarter’s results. Although certain economic metrics were released overnight, the positive GDP and industrial production figures were enough to boost market optimism.

Chinese Data Outperforms Estimates

Although expansion has been faltering in many areas of the economy, data released by the National Bureau of Statistics and the People’s Bank of China overnight added to confidence that policymakers would take the steps necessary to preserve growth. Amid the weakest expansion in decades, the only real disappointment was industrial production which climbed by 9.00% year over year versus expectations of 9.40%. However, despite the one negative mark, the quarterly GDP growth acceleration was enough to defuse some anxiety after rising significantly to 1.80% after printing at 1.10% for the first quarter. The positive developments were accompanied by stronger retail sales figures with annualized spending rose by 10.60% and new loan creation surged by 14.30% over the last twelve months. Risk assets rose across Asia on the news, led by stocks while the USDCNH pair continues to trade nearly unchanged at 6.6909.

Bank of England Surprises With Abstention

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Concerns about the health of the economy had raised widespread speculation that the Bank of England would eagerly accommodate monetary policy in its latest decision to help combat the referendum headwinds which have seen business investment and consumer sentiment decline. Instead of slashing the benchmark rate by an anticipated 25 basis points, the Monetary Policy Committee refrained from adjusting interest rates or quantitative easing, leaving policy on hold. Nonetheless, in their statement, the MPC did mention that the door was open for an expected August rate cut after only one member of the 9-member committee voted in favor of dropping rates during the latest meeting. Although the new leadership team has been put together, economic progress now depends on the exit negotiations and how they gradually progress. The EURGBP pair plummeted following the GDP announcement, falling as low as 0.8258 before rebounding modestly.

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US PPI Climb Heightens Probability of Rate Action

In another positive sign for the outlook for US monetary policy, the latest producer price index report shows that inflation is rising at a blistering pace, helping to raise the probability of further rate hike normalization. As one of two Federal Reserve mandates, inflation is a critical component of decisions that has remained stubbornly low over the last year. However, with the pace of increase accelerating to 0.50% on a monthly basis and 0.30% on an annualized basis suggests that the stage is set for another climb higher in consumer price inflation. All eyes will be trained on US consumer price inflation set to be released later in the session, with the hope that annualized CPI reflects strengthening price developments in other areas as the threat of disinflation fades. Data has supported the continued USDJPY push higher as risk sentiment improves on the back of stronger data.

Copper Hits Multi-Month Highs on Stimulus Hopes

In spite of a complaint from the US to the World Trade Organization on the subject of copper duties and export tariffs, prices of the base metal continue to rise on the prospect of expanded stimulus measures across the globe. Higher growth in China and speculation that Japan will add to ongoing accommodation has sent US copper futures to the highest levels since early May while futures on the London Metals Exchange climbed to prices last seen late in April. Part of the boost has come from poor weather conditions which are preventing exports from leaving Chile, however, as stockpile data from London shows, a new glut may be building in the industrial metal, hurting the outlook for prices should supply continue to outpace demand. Copper prices have strengthened since the Chinese GDP release, climbing to $2.2370 per pound.