Forex Analysis: Chinese Retail Sales to Have Greatest Impact in Weekend Data Reports

The upcoming set of Chinese data to be released Sunday midnight (GMT) will be the first major set after the recent transition of power in government. No major surprises are expected to be reported in the November data, but markets may focus on previously secondary data, retail sales and industrial production, rather than the Consumer Price Index and Producer Price Index when gauging the health of the world’s second largest economy and the path of future policies to avoid a “hard landing.”

GMT	November Data	EXP	PREV
1:30	CPI (YoY)	2.1%	1.7%
1:30	PPI (YoY)	-2.0%	-2.8%
1:30	Industrial Production (YoY)	9.8%	9.6%
1:30	Industrial Production (YTD) (YoY)	10.0%	10.0%
1:30	Retail Sales (YoY)	14.6%	14.5%
1:30	Retail Sales (YTD) (YoY)	14.1%	14.1%
1:30	Fixed Assets Inv Excl. Rural YTD (YoY)	20.9%	20.7%

Above data will be released on Sunday, December9th. Trade, money supply, loans and foreign investment data are currently unscheduled but will be released during the week.

In 2011 inflation rates were the primary concern of the central government. Large jumps in food prices pushed CPI up to a 6.5% annualized pace, which prompted both the government and People’s Bank to slow lending, raise interest rates and require banks to hold more reserves. However as inflation subsided, it came at the cost of a slowing economy, which was further hurt by lower exports to the United States and Europe. The most recent GDP growth rate (2012 3Q) has dropped to a level comparable to 2002 levels, discounting the 2008-2009 recession. Thus while inflation was the problem in 2011, a severe economic slowdown in China (with some framing as a “hard landing”) has becoming the problem at hand for 2012 and 2013.

The Chinese economy is currently in a period of transition, away from being reliant on secondary industries (which ultimately relies on exports) towards tertiary service industries. The shift away will increase the productivity of labor, aiming to raise GDP per capita and move the economy away from being overly affected by the health of foreign economies. The government has targeted the GDP growth rate to 7.5%, giving enough slack for the economy to make the transition. While the latest GDP rate has fallen to 7.4%, the central government is not expected to alter its “fine-tuning” economic policies unless there is a sharp change in productivity.

Due to the lack of different types data from China, traders focus on the monthly set that includes inflation, retail spending (a gauge of consumption) and industrial production (a gauge of investment spending). Falling inflation and a now negative PPI (input prices) gives the central government more room to ease monetary policy if GDP or other growth data starts to decline shaper than expected. Hence inflation data now has taken a backseat to retail and industrial production, as the greatest danger is no longer rising prices, but a slowing economy. However, the central government is unlikely to publically start any new stimulus programs or large rounds of easing even with declining data as it is still in the “fine tuning” phase.

Markets will be closely monitoring the Chinese data to be released before Monday trading starts in Asia, focusing on retail sales and industrial production. Given the current state of economic policies, only a sharp drop in the two data points will stoke expectations for new stimulus, which will help risk-correlated currencies including the Australian and New Zealand dollars. A release close to expectations could lead to slight gains in those assets, but may fade over the trading day as markets factor in that the Chinese economy is continuing to moderate.

-- Written by David Liu, DailyFX Research

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