Believe in the Chinese Boom and not in Dr. Doom

In the 1960ties, the British mass tabloids reported in the summer months about the emergence of the monster of Loch Ness. This year, the monster had been replaced by the talk of a double dip recession in the US and in China. Even expert economists like “Dr. Doom” Nouriel Roubini explain that the double dip monster is looming around the corner. But like in the case of the monster of Loch Ness, lot has been written about the douple dip recession, about it has never been seen when monetary policy was expansionary. All those experts predicting a double dip recession in China had been proved wrong over this weekend.

Chinese statistics for industrial production and consumer price inflation were initially scheduled for release later this week, however, last Friday, the statistics office announced that the data would already been published on Saturday local time. Many experts and market participants expected that the re-scheduling was due to disappointing figures. But it turned out that all those experts were completely wrong. While the consensus of economists had been looking for a rise of industrial production in August by 13.0% yoy – not a weak number by any standards – the actual rise was almost a full percentage point higher at 13.9% yoy.

Chinese consumer price inflation came in as expected at 3.5% yoy, however, the rise of the inflation rate was driven by food prices, which is not a surprise given the rally of agricultural commodities in August due to the drought and harvest short-falls of wheat in the Black Sea region. A sound monetary policy would look through food price inflation as fighting higher agricultural prices after a poor harvest season would cause more harm then benefits. And the lower than expected rise of producer prices by 4.3% after 4.8% yoy in the preceding month would also argue for keeping monetary policy unchanged. However, Chinese monetary aggregates expanded too strongly. New loans rose to 545bn yuan from 533bn in the previous month while the consensus was looking for a drop to 500bn yuan. Also the growth rate of money stock M2 jumped from 17.6% yoy to 19.2%. Thus, a further tightening of Chinese monetary and credit policy has to be expected.

Economists have the reputation of not coming to a clear conclusion and arguing by on the one hand and on the other hand. However, the mixed economic data out of China on Saturday makes it difficult to draw a conclusion how base metal markets will react at the start of the new trading week. The rise of industrial production and the slower increase of the PPI would clearly argue for a rally, in particular in the copper market. However, the thread remains that the Peoples Bank of China will tighten monetary policy further given the surge of monetary aggregates. Thus, we would put a slightly higher probability on the scenario that base metals recover from the fall at the end of last week and continue to climb higher. However, the risk scenario that the market prices in a tighter monetary policy and sells base metals has also a high likelihood. Thus, we would remain long but would also buy some downside protection.

The Chinese economic data is probably negative for gold. The stronger rise of industrial production should reduce the fear of a double dip recession. Investors’ risk appetite is likely to increase, which implies that funds will flow out of the safe havens into the stock markets. The US Treasury market saw a slight rebound at the beginning of last week, but ended the week lower. The upward trend, which had been in place since April, has ended by various indications like trend line violation or MACD falling below its signal line. Gold come close to the record high last week, but did not reach it. It also closed lower on the week. Thus, we expect that the close correlation between gold and the US T-Note future will hold. Both markets are likely to trade lower on the outlook that the global economy will not dip into a renewed recession.