4/13/2012
By Carlos Guillen, Research Analyst

Equities Get Axed

After a rather nice bounce in the last couple of trading sessions, equities got slashed this Friday the 13th as investors tried to sort out the less than expected GDP growth data from China, together with less than expected consumer sentiment results and in-line consumer price index.

The highly anticipated Chinese GDP growth rate for the first quarter landed at 8.1 percent, below economists' consensus estimate of 8.3 percent. So while the rate of growth is still phenomenal by any standard, it is clear that Chinese GDP will continue to grow at a decreasing rate; in fact, Chinese GDP growth was 8.9 percent in the year-ago period, and at the moment it appears that economic growth is not living up to expectations, threatening to have a negative effect on our economy. On a positive note, the Chinese cooling economy may serve to push the nation's economic leaders to increase liquidity further to counter decreasing domestic and European demand, and of course this would bode well for equity markets.

The question at the moment is just how much slower will growth be in China this year. As it stands, in the beginning of March, China set its 2012 GDP growth target at 7.5 percent, down from the 8 percent goal in 2011, and according to the World Bank, China's economic growth may slide to a 13-year low in 2012, as a sluggish world recovery damps export demand and as domestic investment and consumption growth decelerate. The Bank cut its estimate for China's expansion this year to 8.2 percent from a January projection of 8.4 percent. Despite the reduction in forecasts, it is interesting to note that the Bank's estimate is still much higher than that forecasted by the Chinese government. Perhaps the China is low balling their estimates in an effort beat it when all is said and done.

Also giving investors something to be concerned about was consumer sentiment data that did not beat expectations, although the outlook for the short term turned a bit optimistic. The University of Michigan Consumer Sentiment April preliminary result landed at 75.7, which was lower than the Street's expectation of 76.1, decreasing from the 76.2 reached last month and ending a rather encouraging trend that had been developing for the prior seven months. On the other hand, the index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, increased to 72.5 from the 69.8 posted in March.

While the main driver of consumer sentiment had been an increasing jobs backdrop, it now appears that that positive sentiment has been declining. This also coincides with the disappointing initial claims data as of the past couple of weeks along with the huge miss on non-farm payroll numbers last Friday. The labor market showed a surprising sign of cooling in March, as employers added 120,000 jobs during the month, half as many as in February, and while the unemployment rate did decline, the fact that so many people moved out of the work force was the main reason for the rate improvement, not very encouraging at all.

Perhaps not really a market mover, inflation data was overall in line with expectations. The consumer-price index climbed 0.3 percent, matching economists' consensus estimate. Core inflation, which excludes more volatile food and energy costs, rose 0.2 percent, just as the Street expected. On a more positive note, however, gasoline prices appear to have stabilized, and this may serve to easy worries of a consumer spending slowdown that would result from higher gas prices.

Carlos Guillen
Wall Street Strategies