Any analysis of the stock market action or the macroeconomic picture done prior to Friday morning is likely to be tossed out the window this morning. The bottom line is the action taken by the People’s Bank of China and the most recent comments made by the ECB’s Mario Draghi now trump everything.
China’s Surprise Move
In a surprise move, the People’s Bank of China cut its one-year benchmark lending rate by 40 basis points (0.40%) to 5.6% after the market close on Friday. It was the first time the Chinese had cut rates since July 2012.
The PBoC attempted to downplay the significance of the move by saying that the rate cut was not a change in monetary policy. In a statement, the bank said that there is no need for aggressive stimulus with economic growth still at a reasonable rate.
However, anybody that has been paying attention knows better. Remember, a growth rate of 7%, while admirable almost anywhere else in the world, is simply too low in China. The current assumptions are that the world’s second biggest economy will likely miss its growth target of 7.5% this year – perhaps by a wide margin.
Recall that just yesterday, the flash PMI came in at 50.0, which is right on the line between expansion and contraction mode for the manufacturing sector and was a 6-month low. Oh, and the Output Component fell to 49.5 in November. HSBC said, “Disinflationary pressures remain strong and the labour market showed further signs of weakening.”
Separately it was reported that the Chinese economy grew by 7.3% year-over-year in the third quarter – the slowest pace in more than five years…
David Moenning is Mr. Moenning is President of Heritage Capital Research, a privately owned, investment research firm. Heritage focuses on active risk management and an “own the best and ignore the rest” equity selection strategy.
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Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.