Weekly Macro Comment Biggest In The World The Chinese Car Market

13 July 2009

Weekly Macro Comment Han de Jong, Chief Economist

Biggest in the world: the Chinese car market •

German industry experiences tangible growth (albeit from depressed levels)

•

Chinese car market overtakes US for first time ever! Perhaps for good?

•

Dutch house prices down 5.6% yoy in Q2

•

Lower bond yields and lower oil prices supportive of the recovery

Equity markets are under pressure. According to most

US: ISM non-manufacturing

commentators that is because of doubts concerning the economic recovery. Nevertheless, last week’s macro data (of which there was not much) mostly provided positive surprises.

index

65

This underscores our cautiously optimistic view on the outlook

60

for the next six to twelve months. On fundamental grounds, I

55

therefore suspect that the correction in the equity market is just that, a correction. With many market participants still on the

50

sidelines, I think the market will at some stage change direction

45

once more. What is needed for this to occur? Three things

40

probably. First, we need confirmation that the recovery is not faltering. Second, we need more positive corporate news flow.

35 2005

And third, we need an end to the recently displayed very tight correlation between short term movements in various markets.

2006

2007

2008

2009

Source: Bloomberg

In recent weeks some developments have occurred strictly simultaneously: lower equity prices, higher bond prices, a

US initial jobless claims fell to 565,000 in the most recent

stronger dollar, a lower gold price and lower oil prices. The

week, from 617,000 in the previous week. This is a meaningful

rationale seems to be based on uncertainty about the

improvement. The peak in this series was 674,000 in March.

sustainability of the improvement in macroeconomic data. This

Our cautiously optimistic view requires a continuation of the

hurts equities. It also casts doubts over demand for oil and

decline in this series in the weeks ahead. On the negative side,

thus pushes down the price for oil. Slower economic growth is

US consumer confidence fell unexpectedly in July according to

also supportive of rising bond markets. The fear factor

preliminary data provided by the University of Michigan.

stimulates a safe haven flow into the dollar, which in turn undermines gold, given the strong inverse relationship

Germany: Factory orders and industrial production

between the two. These relationships must be broken. Market participants must come to realise that rising bond prices and lower oil prices are good for the economic outlook and should therefore support risky assets, not undermine them. If market participants are slow to figure this out, the facts will overtake

% yoy

20 10 0

them. Falling oil prices will lead to a further drop in inflation,

-10

which will support real spending power in the economy. And

-20

lower government bond yields will push mortgage rates lower

-30

and support housing markets. The non-manufacturing ISM index in the US, which measures

-40 05

Factory orders

business confidence in the services sector rose from 44 to 47 in June. This was the highest reading since September last

06

07

08

09

Industrial production

Source: Bloomberg

year. 47 is still quite low from an historical perspective, but we are now quickly approaching the make-or-break point of 50,

Data on German orders and industrial production was positive.

above which the sector is supposed to be expanding.

Orders rose 4.4% mom in May and fell 29.4% yoy. That is a massive decline, but better than February’s 38% decline.

HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT

13 July 2009 Industrial production rose 3.7% mom in May to reach a level

Dutch house prices do not usually make international

that was 17.9% lower than a year earlier, also better than the

headlines. Nor are they likely to do so now. However, as we

trough of -22.3% yoy reached in April. Manufacturing output

are a Dutch bank, we follow the domestic market with interest.

increased by 5.1% mom in May.

The NVM, the association of real estate agents, reported an improvement in the number of transactions in the second

Chinese car sales are surging. In June, 872,900 passenger

quarter and a small rise in prices (not seasonally adjusted)

cars and light vehicle trucks were sold, a rise of 48%, in

compared to the previous quarter. According to the NVM data

response to stimulus measures. Allegedly, June marks the first

prices were down 5.6% yoy. Rival data from the Land Registry

month ever when Chinese car sales outpaced US car sales.

show prices were down 2.5% yoy in May. The Land Registry

Will the US market ever take top spot again? It probably will as

data is more comprehensive, the NVM data more timely. The

the US market is currently very depressed while the Chinese

pace of price decline is still very modest compared to some

market is on steroids.

other countries. However, we fear that the correction has only recently begun and house prices will remain under pressure for

China: Export and import growth

some time yet. We reckon that in 2009 and 2010 together, prices will drop by some 15% or a little more. Downside risks

% yoy

probably outweigh upside risks.

60 40

In recent weeks we have felt some discomfort over oil prices

20

and bond yields. The rise in both in recent months is

0

undermining the recovery. Higher oil prices eat away real

-20

disposable income while higher bond yields push up mortgage interest rates. Indeed, as US Treasury yields rose from 2%

-40

early in the year, to 4% recently, US mortgage applications

-60 05

06

07 Export

08 Import

09

Source: Bloomberg

have fallen. More recently, however, yields are falling again, as are oil prices. We welcome this development as it increases the chance that the green shoots will develop into mature, flower-bearing plants.

China’s trade balance registered a surplus of USD 8.25bn in June. The country’s monthly trade balance shows a strong seasonal pattern, but this was the smallest surplus for the month of June since 2004. Exports performed relatively poorly, -21.4% yoy, but imports were down ‘only’ 13.2%, the strongest reading since October last year. This should be good for the trade partners. Meanwhile, the US trade balance deficit amounted to USD 26.0 bn, the lowest in almost a decade. The peak in the deficit was reached in 2006 of more than USD 67bn. Declining Chinese surpluses and shrinking US trade deficits suggest that the global economy is in the process of rebalancing. Another small positive came from India, where industrial production was up 2.7% yoy, the strongest reading since September last year. In the other hand, Japanese machinery orders were poor, casting doubt on the recovery of investment spending in the region.

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HAN DE JONG +31 (0)20 628 4201

ECONOMICS DEPARTMENT