This begs the question: Are market expectations too low? As I wrote last week, read the market reaction, not the Summit statement.
The Chinese hard-landing story
Consider the case of how the market is reacting out the story on China and the possibility of a hard landing. On the weekend, Barron's published a cover story called Falling Star, summarized by the subtitle "The Chinese economy is slowing and is likely to slow a lot more. Get ready for a hard landing."
China, the article says, is an accident waiting to happen. The points made aren't anything new for those of us who have been watching China for a while:
After three decades of annual growth averaging 10%, China's bullet-train economy is slowing markedly. Economic problems in Europe and the U.S. are stunting export growth, long the primary driver of China's economic miracle. Growth in industrial production has likewise been decelerating for months. This year growth in gross domestic product could slip to 8%—and it may get a lot worse from there. Though recently announced interest-rate cuts and a ramp-up in the government's already massive infrastructure spending could postpone the day of reckoning, to us it looks like the Great China Growth Story may be falling apart.For those without a Barron's subscription, Josh Brown has a good summary of the article here.
Overnight, both China's official PMI fell to 50.2 from 50.4 and the HSBC manufacturing PMI fell to 48.2, indicating weakness.
What did the market do in the face of all these negative stories? The Shanghai Composite ended up flat on the day Monday and rose on Tuesday. In my last post (see Can China hold things together?), I pointed out a number of extreme risks that are not outlined in the Barron's article, but current market conditions indicate few signs of financial stress.
Is the US slowing?
As the sun rose on Monday across the globe, individual country PMIs were reported and the reports were generally punk. Contraction, rather than expansion, was the word of the day. As the US market opened, the Markit US PMI came in weaker than expected and ISM missed with a 49.7 reading, compared to market expectations of 52.0. Ed Yardeni has a good post summarizing the broad nature of the slowdown. He cites initial unemployment claims, durable goods orders, regional business surveys, consumer sentiment and consumer spending as sources of economic weakness.
Treasuries rallied hard on the news of economic weakness, but stocks ended the day flat.
On the other hand, housing is showing signs of a rebound. The New York Times reported last week:
Announcements of a housing recovery have become a wrongheaded rite of summer, but after several years of false hopes, evidence is accumulating that the optimists may finally be right.Calculated Risk also pointed out that the number of cities with increasing prices were on the rise.
The housing market is starting to recover. Prices are rising. Sales are increasing. Home builders are clearing lots and raising frames.
What's going on? Is the American economy tanking or recovering? If housing is indeed recovering, or even stabilizing, it would provide the underpinnings of a bullish impulse for stocks. The New Deal Democrat has an insightful post where he believes that housing is shaping up to be the stealth (bull) story of the year.
A NFP preview
Friday's NFP release will be one of the first acid tests of the bull/bear debate on the US economy. The consensus expectations for this month is 80K, which seems very low to me. Gallup does a daily survey of the employment situation, which suggests that while the raw unemployment rate will be unchanged from last month, the seasonally-adjusted unemployment rate will fall.
If I were a betting man, I would take the "over" bet on NFP this Friday. If I am right, it would mean another relief rally because market expectations have been racheted down too low.
Don't get me wrong. My inner investor continues to be very nervous about the macro backdrop. The global economy is weakening. Europe just kicked the can down the road by a few weeks and Greece will undoubtedly fall apart again before the end of 2012. I am also concerned about the tail-risk of a black swan event coming out of China.
My inner trader is telling me that we are poised for a relief rally on any form of good news, largely because expectations are too low. Enjoy the party but stay close to the exits.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.