Heading For a Fall? Aussie Rate Cut Hints at China Slowdown

Listen to the notes that aren't being played.

Serious students of classical music will recognize this command as the best way in which to assess the beauty and efficacy of a particular piece or movement. It's worthwhile advice for investors, as well, as they consider the strength of the global economic recovery and the mixed messages emanating form various policy makers and political leaders around the world.

Tuesday's surprise interest rate decision from Australia's central bank is a perfect case in point: what wasn't said (at least more than once) by Governor Glenn Stevens is probably far more important than any of the number of reasons he used to justify a 50 basis point cut in the Reserve Bank's key lending rate.

China's economic growth is slowing faster than many think. And that's a big deal.

Data from its National Bureau of Statistics painted its usual rosy picture of manufacturing prowess, with the April PMI survey coming in at a robust 53.3, a fifth consecutive advance from its November 2011 nadir. Dig a bit deeper, however, and analysts will tell you that seasonally-adjusted figures suggest the April tally is actually *weaker* than the March and February readings and was, in fact, one of the limpest April readings on record.

What should stir deeper concern is the fact that new orders slowed markedly, while export orders grew. The data suggest China's old-school style of off-setting domestic weakness with export-led growth (powered by an unfairly valued currency) is back on the table. And why not? The April employment component of the PMI survey hints at contraction. Social unrest linked to joblessness is something Premier Wen Jiabao and the Chinese leadership - currently engaged in a humiliating controversy surrounding ouster of Politburo member Bo Xiali and the arrest of his wife on suspicion of murder - simply won't allow.

Canadian Contraction

Canada reported Monday what might be the next trend in export-led economies with strong currencies and domestic concerns about inflation: a big monthly slump in gross domestic product.

Plunging activity in potash mining, nickel production and oil and gas extraction added up to a 0.2 percent contraction - around 0.4 percent shy of Bay Street estimates. Production slumps of that magnitude aren't accidental. They indicate a significant degree of nervousness from the men and women who run international companies.

Tuesday's RBA surprise - analysts' were looking for a 25 basis point cut - suggests the men and women who run the economy most closely linked to China's ever-expanding growth are equally concerned.

Some will argue the steep cut is simply a way to offset the impact of an austerity-driven budget due next week from Finance Minister Penny Wong aimed at trimming its A$29.4bn cash deficit.

Maybe.

Few doubt the principal reason Australia avoided recession during the global credit crisis was its close ties to China and the spill over from its 22.5tn Yuan stimulus in 2009. International Monetary Fund economist Ben Hunt estimates that China's appetite for Australia's exports boosted GDP by as much as 12 percent over the past decade and that the contribution could reach as high as 35 percent by 2020.

Stevens and Co. understand this very well and surely make the connection more visceral following China's 8.1 percent GDP print - the slowest pace of growth in three years - back in early April.

China's myriad problems will very likely be solved by another round of monetary easing and structural tinkering. To wit, securities regulators recently cut transaction fees on major domestic stock exchange trades and there's talk of lifting import tariff restrictions as well and Wen has promised to "fine tune" policy responses while keeping one eye firmly fixed on China's bubble-like property market.

Still, in a world where 2 percent growth might be the "new normal" for developed G-7 economies (and many would be lucky to get there inside the current, or even the next, business cycle) investors will be wise not to rely on China machine-like repetition of 8 percent and 9 percent growth.

Especially if you listen to what's not being said.