Collective Sigh Of Relief In Capital Markets Or Turnaround Tuesday?

The relentless pounding that investors suffered in the first two weeks of the year has subsided. It is too early to have much confidence that a turn is at hand. By various measures,the sell-off had stretched the technical condition. In any event, the stability of the yuan, gains in the Chinese stocks, and a bounce in oil prices appears to be giving the bears a day off. 

Chinese economic data (Q4 GDP, retail sales, industrial output, and fixed asset investment were a little softer than expected. The data are reported to a tenth of a decimal point, but this gives a misleading impression of the precision. While many are particularly skeptical of the accuracy of the GDP measure (6.8% year-over-year, down from 6.9% in Q3), many other estimates do not put growth that far from the official estimate, though of course there are some who claim China is growing at less than half the reported pace.  

Even if we concede the likelihood that Chinese growth is slower than the official estimate, we suggest the overall size of the economy may be larger than reported. There is a range of activity, like in other countries, that may not be including in the calculations. We also note that China has agreed to adopt a more robust data collection procedure of the IMF.     

The US offers a contrasting approach. The US will report Q1 GDP later this month.It will then be revised, often to a statistically significant degree, over the next few months, and then revised for several years.  It seems that the main difference is that people suspect that the Chinese data is not reliable because of political considerations, while the US, the data is not reliable due to technical competence (the difficulty in measuring GDP of such large and complicated economy).  

While the slowing of industrial output (5.9% year-over-year vs. 6.2% in November and 8% in December 2014) may be part of the transition toward services, we caution that deflation at the wholesale level (producer prices have been contracting for four years) and inflation in services may be contributing to the apparent shift. Separately, Chinese retail sales slowed to 11.1% (year-over-year) from 11.2% in November, which was the strongest rate in 2015).Still, in a world that suffers from insufficient aggregate demand, such strength is the envy of many.