Trade Issues Filter Through To Chinese GDP Data

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In another sign that trade issues are having a significant impact on China’s economy, the latest data from the Asian nation showed a slowdown in economic growth as the rate of GDP expansion receded to 6.6 percent in 2018. The rate of growth for the Chinese economy was the lowest in twenty-eight years, since 1990. The fourth quarter GDP growth was at 6.4 percent, down from 6.5 percent in the third quarter.

The total size of China’s nominal GDP is likely to stand around the $14.24 trillion level in 2019, in second place to the United States with a GDP of $21.5 trillion. The days of double-digit percentage gains in the Chinese economy came to an end several years ago. However, we must keep in mind that it is more than a challenge to continue to post the level of percentage gains of the past given the increase in the size of the overall economy. Therefore, a 6.4 percent gain in 2018 amounts to more growth than a double-digit gain two decades ago when GDP was a fraction of its current level. China consumes a lot more today than it did when the rate of growth was double the current level.

However, the world had become addicted to China’s economic growth engine that has increased demand for commodities and products from nations and companies around the world. The massive appetite of the Chinese population that continues to grow is an expanding addressable market of consumers for producers and manufacturers around the globe. Meanwhile, the stock market did not care for the news and the prices of US stocks headed lower on Tuesday, January 23 on the back of the Chinese data. It appears that the Administration is pushing China in the wake of their latest GDP release as President Trump senses weakness on the other side of the negotiating table. During the trading day reports that the United States turned down a preparatory meeting with Chinese trade negotiators as they want China to come back with a more substantial offer drained some optimism from markets. However, the President’s chief economic advisor, Larry Kudlow told markets before the close that the report about trade talks was not accurate as there was never a meeting on the schedule, but stocks still closed not far from their low on Tuesday. The DJIA fell by around 1.2% on the session. 

Source: CQG

As the daily chart of the E-Mini S&P 500 contract highlights, stocks opened lower on Tuesday and kept on falling throughout the session in what turned out to be the most significant move on the downside in 2019 since the first two trading sessions of the year.

While trade issues are contributing to economic weakness, it may be only a matter of time before another problem begins to weigh on US economic growth. The government shutdown entered its second month and has left approximately 800,000 workers without paychecks. The longer the standoff between Congress and the administration the partial shutdown will begin to filter through to economic data. While a slowdown will likely cause the Fed to pause their tightening of credit, it will also cause fears of a recession to rise. It did not help markets when many of the attendees at the World Economic Forum in Davos, Switzerland expressed the opinion that global economic growth will slow in 2019.

The markets witnessed more than its share of volatility during the final three months of 2018 which came to a crescendo in late December. The beginning of 2019 brought a new calm as the prices of crude oil and stocks recovered over the first two weeks of the year. However, the price action on Tuesday, January 23 is a reminder that the markets are far from out of the woods these days and that the wide price variance we saw last year could return in the blink of an eye.

When the Chinese economy catches a cold, the rest of the world often comes down with a case of the financial flu. Therefore, the data out of Beijing at the start of this week was a warning sign that the days of volatility in markets could be returning with a vengeance over the coming sessions. Late in the day, IBM reported earnings that beat estimates to add confusion to the path of least resistance for stocks over the coming sessions.


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