Thursday, March 5, 2015
Pre-open sentiment is pointing towards a modestly positive open for stocks today, a day ahead of the all-important non-farm payroll report for February. On today’s data docket, the interest rate announcement from the European Central Bank (ECB) came as no surprise, though China’s growth target downgrade likely surprised many.
ECB President Mario Draghi’s press event will shed more light on the details of the central bank’s bond purchase program. But its QE program hasn’t gotten underway yet; the market has been doing the positive work for the central bank, with the lower value for the common currency helping spur the region’s export sector. It is this transmission mechanism through the exchange — more than the programs’ effect on credit conditions — that is giving the Euro-zone economy the growth nudge to push it away from a deflation path.
China’s new 7% GDP growth target for this year, down from last year’s +7.4% growth and the +7.5% previous growth, would still be the envy of any economy. But for market participants used to seeing double-digit GDP growth rates in recent years, this is quite a climb down. The positive angle of the lowered growth target could be that it’s an acknowledgement from the authorities that they no longer have as much control over the growth drivers as they used. Chinese authorities would famously ‘advise’ the provincial leaderships to achieve specific growth targets who would then use an investments-driven model to come up with the desired numbers (some even accuse the authorities of cooking the books).
The growth downgrade would be a big positive in the long run if its inspiration is the realization that investments no longer move the needle as they used to. It has been a long-term goal of the country to shift the composition of growth from investments to domestic consumption, and this could be a an early indication of that change.
In corporate news, we got a weaker-than-expected earnings report from Joy Global (JOY), and AbbVie (ABBV) is acquiring cancer biotech company Pharmacylics (PCYC) for $21 billion.
Sheraz Mian
Director of Research
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