Asked the general trend of the first quarter start
Comment of the Day

May 10 2016

Commentary by Eoin Treacy

Asked the general trend of the first quarter start

This missive attributed to an “authoritative source” from the central government of China highlights the challenges facing the administration as overcapacity in a number of key sectors is unwound. Here is a section from the Google Translation:

However, it is undeniable that we are faced with the inherent contradiction has not fundamentally resolved, some new problems have also been exposed. "Stability" of the foundation is still mainly rely on the "old way", that is investment-led, large fiscal balance pressure in some areas, increased economic risk probability. Especially private enterprises to invest in a substantial decline in the real estate bubble, an increase in excess capacity, non-performing loans, local debt, equities, foreign exchange, bonds, and so the risk of illegal fund-raising point. Some lower market-oriented, industrial low-end, single structure of the region, economic downward pressure is still increasing, highlighting the problem of employment, social conflict has intensified. Thus, in the face of the main contradiction is down structural than cyclical situation, "into" is "stable" foundation. "In" is to solve the economic operation of the supply side, structural and institutional issues, which will take time, is still in the initial stage, the new power is also not afford to pick beam.

Comprehensive judgment, our economy can not be U-shaped, but can not be V-shaped, but the L-shaped trend.

Want to emphasize that this is an L-shaped stage, not a year or two past. The next few years, the overall weak demand and overcapacity coexist hard for fundamental change, economic growth is not possible, as once picked up it will continue upward as before and one after another to achieve high growth years. "Step back" in order to "two steps forward." We are confident about the development prospects of China, China's full economic potential, toughness, large room for maneuver, if not exciting, not much speed down. In this regard, it must be internalized in the heart outside of the line. Some economic indicators to rebound, do not visibly; some economic indicators down, do not panic.

Eoin Treacy's view

Generally speaking when we hear from an unnamed authoritative source in what is considered a mouthpiece for the central government it is taken as a tacit reflection of standing committee perspective. An L-shaped recovery aimed at the rationalisation of overcapacity and acceptance that the bad loans problem will need to be dealt with, can be viewed as net positives. This is despite the fact it means China is unlikely to be the global growth leader in the next five years that it was in the last decade. 

Looked at from a broader perspective if China’s growth is expected to under achieve, monetary policy is likely to be reasonably accommodative to compensate for declining velocity of money. Both Europe and Japan remain committed to easy monetary policy so the big question is how willing will the Fed by to go it alone in raising rates considering the effect that would have on the Dollar.  

12-month yields are pricing in barely one interest hike before May 2017 and a sustained move below the trend mean would suggest bond traders are taking even that prospect off the table. As I discussed in last night’s Subscriber’s Audio, the rally from the 2009 lows has been liquidity fuelled and remains so. If the Fed continues to delay raising rates that would suggest liquidity conditions will continue to be easy which would support a medium-term bullish view on stocks. 

The S&P 500 extended its rally from the 2050 region today and a sustained move below it would be required to signal more than a temporary peak. 


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