Solid US Economic Data Allows Fed to Remain “Patient” While China Waits for Stimulus to Trickle Down

U.S. and China economic data released on Wednesday and early Thursday yielded different results for investors with data from the states putting little pressure on the U.S. Federal Reserve to raise interest rates over the near-term and data from China leaving investors wondering about the impact of recent stimulus measures. Meanwhile, while all eyes seemingly have been on the U.K. and the Brexit drama, America’s top trade negotiator tried to slip one past investors by saying that tariffs may not be rolled back.

While the news has been generally positive from U.S. stock indexes this week, the price action in China’s a major indexes indicates it is going to take time for the macro data to respond positively to the new government stimulus. Furthermore, the combination of stimulus and a potential end to the year-long trade dispute with the U.S., suggests that China growth will improve in the second quarter, but it is going to take time.

U.S. Data Means Fed Will Remain Patient

It was less than a week ago that investors were talking about a stock market top and a weakening U.S. economy shortly after the release of the U.S. Non-Farm Payrolls report that showed a plunge in the headline employment change number. Conditions have changed considerably this week with the technology-based NASDAQ Composite and the benchmark S&P 500 Index hitting new highs for the year on Wednesday.

On Monday, investors welcomed good news for the economy after recent disappointing reports. U.S. retail sales unexpectedly rose in January, lifted by an increase in purchases of building materials and discretionary spending.

On Tuesday, the U.S. government reported that the consumer price index climbed 0.2% in February following three straight months of no change. The increase in the CPI over the past year, however, slowed again to 1.5% from 1.6%. Last summer, it was at 3%.

Wednesday brought more good news for stock market investors as encouraging news for future growth, a key category that tracks business investment plans posted its biggest gain in six months. The Commerce Department also said that orders for durable goods rose 0.4 percent in January.

Additionally, U.S. construction spending surged in January, with investment in public projects rising to a more than eight-year high, which could boost economic growth estimates for the first quarter. This news largely offset weaker than expected producer inflation data.

This week’s data has been just strong enough to indicate the economy still has a pulse despite talk of a global economic slowdown. But just weak enough to keep the Fed at bay with its “patient” approach. This is generally good news for U.S. stock market investors.

China Data Indicates Struggling Economy

After China released disappointing trade balance data last Friday, the hits just keep on coming with today’s data indicating the trade dispute with the U.S. is still having a negative impact on the economy and the recently announced stimulus measures haven’t worked their way through the economy yet.

The lowlight of today’s economic releases was a report that showed growth in China’s industrial output fell to a 17-year low in the first two months of the year, pointing to further weakness in the world’s second-biggest economy. Furthermore, industrial output rose 5.3 percent in January-February, the National Bureau of Statistics (NBS) said, less than expected and the slowest pace since early 2002. Factory output growth had been expected to slow to 5.5 percent from December’s 5.7 percent.

Additionally, an official factory survey showed manufacturing output contracted in February for the first time since January 2009, while factory-gate inflation in February hovered at multi-year lows, pointing to further pressure on industrial profits.

A Tale of Two Policies

So while the solid U.S. economic data allows the Fed to sit back and be “patient”, U.S. stock market investors can continue to buy with confidence. In the meantime, Chinese investors have to sit back and wait for the hundreds of billions of dollars in additional tax cuts and infrastructure spending to work its way through the economy. That is, of course, unless a trade deal is reached over the near-term.