China's Strong GDP, Turkey's Strongman Prez & US's Weak Inflation

China's Strong GDP, Turkey's Strongman Prez & US's Weak Inflation

With markets closed in Europe and elsewhere, US stocks rallied after the Easter weekend. China reported GDP growth and Turkey voted to grant sweeping new powers to its leader. Weak US price data cast doubt on the Fed's next rate hike. Nevertheless, investors seem to have taken on risk. 

Blue mosque and Hagia Sophia, Istanbul |
Blue mosque and Hagia Sophia, Istanbul | Getty Images

With markets closed in Europe and elsewhere, US stocks rallied after the Easter holiday weekend.

Traders in the US and some countries returned from a long weekend eager to do some buying, after no significant geopolitical or economic crisis materialized during the three-day hiatus. Last week saw a net drop in stocks as investors pulled money out of equities and reduced their risk exposure before the Easter holiday. With North Korea strongly hinting it might test a nuclear weapon and continued tensions around the world, many were wary of what might happen. 

As it turned out, North Korea did not test a nuke, but did launch another medium-range ballistic missile, which failed after about five seconds of flight. In recent weeks, the US had sent warships to the region and, in what the Pres. Trump framed as a kind of deal, the US declined to label China a currency manipulator as promised during the campaign in exchange for China taking the lead in containing Kim Jong Un. Trump has said a military strike is still an option, but chose a restrained response to the launch, which was to commemorate the birthday of Kim Il-sung, the nation's founder. 

China's position relative to the US and North Korea is pivotal and unusual. North Korea relies on China for food and fuel to support its population. At the same time, China is the second-largest holder of US Treasury debt after Japan and was once number one. Rather that simply giving one country leverage over the other, China's role as a US creditor binds the two economies together as intricately as an iPhone is bound to its hundreds of Chinese part suppliers. 

So when China reports GDP growth as it did over the weekend, it encourages investors around the world, including on Wall Street. The Chinese economy had been in the doldrums, with domestic demand lacking. But in Q1 2017, GDP growth accelerated to 6.9 percent, beating economists' expectations and showing broad strength in construction, infrastructure, exports, and retail. It was the second straight quarter of growth, something that hasn't happened in seven years. Better still, China's own debt burden, which had ballooned in recent years, shows signs of stabilizing. 

European markets were closed Monday as the traditional Easter holiday observance continued. On Tuesday, however, they will have a new development to weigh in on, as NATO and EU member nation Turkey took a major step away from democracy. With the instability of the Syrian civil war to the east and facing the ongoing threat of a Kurdish rebellion, Turkey narrowly passed a referendum to grant sweeping new powers to Pres. Recep Tayyip Erdogan. Even as European monitors questioned the fairness of the vote, Erdogan claimed victory with strong anti-Europe invective in his victory speech. The referendum included numerous changes to the constitution and granted Erdogan, who declared a state of emergency nine months ago, sweeping powers to control, dismiss, and jail his opponents and force policy changes. The lira rose 2.1%, with some investors saying that the victory might increase predictability and draw back foreign investment. Dictators often do.

In the US, retail sales fell for a second month and the consumer-price index fell 0.3 percent. If you don't factor in food and energy, the CPI fell the most since 1982, a development that raises questions about whether businesses can expect sustainable profits in the coming months. Moreover, it reinforced the view that the Fed's go-slow approach to rate hikes should not change and that to speed it up would be risky. Despite that data, investors' own appetite for risk seemed to grow with increased volume pushing all major US stock indexes up, reversing last Friday's losses. 

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