First off, Friday’s nonfarm payrolls (NFP) marked a solid check. The better-than-expected employment change is a huge positive. Unemployment held at 4.9% which is pre-GFC levels, although average hourly earnings were a little weaker, however they are still averaging well above the three-year average.
In all, the NFP shows the economic concerns around the Fed’s rate path may have been a little on the strong side in January and February trading.
The NFP did shift the fed funds futures; however, it’s still only pricing in one rate hike come the end of 2016. This suggests it’s more a concern with the global conditions rather than the strength of the Federal Open Market Committee (FOMC) mandates. Should be a positive for US trade.
This brings us to the next big trading event – how will markets react to China’s economic targets release from Saturday?
Here are the key points:
GDP to average 6.5% to 7% to 2020, with 6.5% to be the defend baseline. This is almost a ‘whatever it takes’ comment, and shows China will not take its foot off the growth accelerator.
CPI to increase to 3%. This is not new, as it’s been the target for the past two to three years, However, CPI is currently averaging 1.5%, so there is work to be done.
M2 money supply growth is set at about 13%, and it’s currently at 13.3%. However, Li has increased the debt ceiling to a record level and will continue to pump money in even if growth remains sluggish – ie, stimulus.
Monetary policy to be ‘prudent with flexibility’.
Continue to tackle ‘environmental issues, urbanization, growth and innovation’. Clearly one or two of these will suffer at the hands of one or two of the others.
Interest rates to ‘maintain appropriate levels from 2016 to 2020’. Considering we saw rates being slashed methodically from the end of 2014 to mid-2015, lower rates seem likely to ‘maintain appropriate levels’.
Budget deficit raised to 3% of GDP. This has actually disappointed many economists, as some were expecting a kitchen sink approach with the deficit at 4% of GDP.
All very stimulating and ‘exciting’ as stocking up of industrial metals will be needed to meet these requirements. Fixed asset investment is forecasted to ramp up, and manufacturing output also needs to ramp up – industrial metal positive and crude positive.
The moves in the energy space have been astounding, with oil naturally migrating to our Q2 target of US$35 a barrel. Crude demand will naturally increase as China moves into the summer months.
Iron ore is currently going through its normal yearly re-stocking process, seeing it move through US$50 a ton. FMG has added over 73% in the past 29 trading days as iron ore rallies, and it’s now the lowest-cost producer of any miner.
The only catch is that Li stated he wants to ‘clean up’ the space capacity in coal and steel. It’s an ‘if’, but if he does follow through on this clause, it will cap iron ore’s current rise now and into the medium-term future.
What Li has also done is put a rocket under the AUD, which is a slight concern, and the RBA will not be pleased. 74 cents is through the November and October highs, and the RBA has been on the record stating it needs the AUD at 65 cents. The China economic target release will put the ‘quasi-China’ currency in the AUD as a key trade, and its ‘perfect storm’ conditions continue.
It does bring the idea of RBA rate cuts back into the foreground if the higher AUD hits exports and impacts economic activity. Our key AUD trade remains AUD/EUR; the European Central Bank meeting this Thursday will make this interesting, but we are long pull back.