China GDP beat reveals cracks

With most of Europe, as well as Hong Kong, Australia, and New Zealand on holiday today, the focus of the day has been on this morning’s tier-1 data releases from China. China GDP YoY for Q1 beat expectations, rising by 4.80% (4.50% exp), and rising 1.30% QoQ (0.60% exp). Industrial Production in March fell to 5.0% YoY from 7.50% in February while Retail Sales had a big miss, slumping to -3.50% YoY (-1.60% exp.) in March from 6.70% in February. Meanwhile, Unemployment in March rose to 5.80% from 5.50% previously, and Capacity Utilisation fell to 75.80% from 77.40% previously.

Overall, the data suggest that China started the year well, but as the quarter has moved on the headwinds have gotten stronger. A slowing property market, sweeping Covid restrictions, the Ukraine invasion pushing up base commodity and energy prices, and a central bank still intent on deleveraging sectors of the economy, have all combined to weigh on China’s growth. About the only thing missing is a meaningful rise in inflation, which is some small sliver of comfort.

It is little surprise, therefore, that mainland equities are heading south today once again, despite China’s PBOC cutting the RRR by 0.25% on Friday, allowing banks to lend more, with agricultural banks’ RRR being trimmed by 0.50%. Markets were disappointed that the 1-year MTF was not also cut on Friday and China’s have your cake and eat it approach seems to be facing more challenges by the day. China will have a second bite of the cherry on Wednesday, when it announces its latest 1 and 5-year Loan Prime Rate decisions.

Virus restrictions across China appear to be heading the wrong way, even as Hong Kong cases plummet. Markets are already seeing the impact on production and trade from the Shanghai lockdowns, and if these start spreading, the picture for China dims considerably, even without the downstream impact from the Russian invasion of Ukraine. China’s official 5.50% GDP target becomes more challenging by the day as consumer sentiment plummets, production costs rise and Covid policies threaten to wreak havoc with production and logistics.  Eventually, this will weigh on other Asian markets as well.

Singapore’s Non-Oil Exports (NODX) fell to 7.70% YoY in March and fell by 2.30%, MoM. Admittedly, it is a volatile data series, but the growth of both electronic and non-electronic exports slowed. Not all of this can be attributed to China of course, but the timing is unfortunate as the MAS has just tightened monetary policy aggressively. The Malaysia and Indonesia trade balances later today will make interesting reading, especially if exports to China ease.

With US and European markets closed on Friday, making Thursday the technical end of the week, we had a choppy session. Firstly, markets did not like a continuation by the ECB, of the glacial pace of a move towards tightening. One can hardly blame them given the events on Europe’s Eastern border, but markets punished the euro, which has slumped to multi-decade support around 1.0800.

In the US, markets took fright at inflation and an impending 0.50% hike by the FOMC in early May. US yields shot higher, and equities slumped once again. Admittedly, part of the equity move could be related to investors reducing risk over the long weekend, an eminently sensible idea. However, US index futures on the big three have headed directly south this morning as well, along with Asian stock markets. Ominously, futures on US 10-year bonds have fallen heavily as well, indicating yields will open higher in the US this afternoon.

That has been great for the US dollar, which rallied strongly on Thursday, and booked gains on Friday and today as well. Substantial falls by the Japanese yen and the euro have led the way, highlighting that the impact of interest rate differentials appears to be accelerating. Both the BOJ and ECB have signalled that interest rates are going nowhere in a hurry. One wonders when the same forces will start to materially impact the yuan and low yield currencies around Asia.

The week is relatively light on the data front globally, certainly for heavyweight data prints. US Housing Starts tomorrow and Markit PMIs on Friday are the highlights. In Europe, we get Eurozone Industrial Production on Wednesday and Markit and Eurozone PMIs for the bloc on Friday. I would suggest all the European data has downside risk. In Asia, apart from trade balances and China’s LPRs, we see India release March WPIs for food, manufacturing, and inflation. Upside prints will increase the noise around the pace of the RBI’s move to a tightening bias and will probably be a headwind for the Sensex.

Japan releases Industrial Production tomorrow, and the trade balance on Wednesday, both of which have downside risks. It releases inflation on Friday, but I haven’t looked at that for 20 years and nor should you. We already know the answer. Apart from being another reason to be long USD/JPY, the main volatility this week from Japan will come from officials speaking about the yen and “watching markets closely” as the yen continues to be crushed by the US Dollar.

On the geopolitical front, the brave defenders of Mariupol have given the Russians a one-fingered salute regarding their kind offer to surrender, although they appear to be on their last legs and the city will not be Russia’s Stalingrad. Realistically, we are not likely to get another way of Ukraine risk aversion sweeping markets until Russia finishes reconstituting and resupplying its forces and commences its offensive in eastern Ukraine.

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