China Deceleration Continues As Stocks Price-In Massive Rebound

The World Bank trimmed its global growth forecast for 2020 due to a slowing China and a synchronized global downturn. This comes despite the Fed, ECB, and BoJ injecting upwards of $1.1 trillion into global markets in the past four months, along with cutting rates 80 times in the last 12 months.

The World Bank’s Global Economic Prospects report slashed 2020 growth by 0.2 percentage points to 2.5% from a June 2019 forecast.

China’s growth outlook for the year is one of stabilization, with growth expected to slip under the 6% mark. Still, there’s a significant risk that a disorderly unwinding of debt could slow the economy even further.

Over the last decade, China has been responsible for 60% of the world’s debt creation – and with the country continuing to slow, that doesn’t bode well for a massive global recovery that equity markets have already priced in.

To get a better view of China’s economy, we turn to Fathom Consulting, who developed the China Momentum Indicator 3.0 (CMI 3.0) that includes twelve measures of economic activity, including retail sales, unoccupied housing, and net trade.

Fathom has had a deep distrust for China’s official GDP data and created CMI 3.0 as an alternative measure of China’s economic activity.

CMI 3.0 prints around 4.7%, has stabilized since the middle of last year. There’s no indication that China’s economy will significantly turn up in early 2020, which means the global economy could continue to stagnate.

Slowing China has also weighed on crude oil prices.

Auto production in China will continue to slow with a decelerating economy.

Global stocks, juiced by trillions of dollars in money printing via central banks and 80 rate cuts, have already priced in a global recovery.

With no massive rebound expected in China in 1H20, this also means the probability of a significant rebound in the US is low. Equity markets are mispriced, thanks to an abundance of central bank liquidity.