Did China's Politburo Throw Markets a Lifeline?

Overview: Speculation that a midday statement by China's Politburo signals new efforts to support the economy ahead of  next week's holiday appears to have stirred the animal spirits.  The unusual timing of the statement helped spark a rally in Asia-Pacific that lifted most of the large market by more than 1%.  Europe's Stoxx 600 has nearly completed the gap created by Monday's sharply lower opening. It is rising for the third consecutive session.  US futures are, however, struggling, after some earnings disappointments.  The 10-year yield was virtually flat on the week coming into today and is up five basis points to 2.87%.  European benchmark yields are up 2-4 bp. The dollar is heavier across the board.  Among the majors, the Scandis and Australian dollar are leading the way.  Among emerging market currencies, only the Turkish lira is unable to gain on the greenback.  Gold is extending yesterday's recovery off the $1872 area and has approached resistance near $1920.  June WTI is making nine-day highs, almost to $107.  US natgas is off a little after yesterday's 5.2% decline.  Still, this just pares the gains from earlier in the week, leaving it up around 5%.  Europe's benchmark is up 2% and about 4.5% for the week. Iron ore prices rose 3%. Although it was, the fourth consecutive gain, it finished 2.8% lower on the week. Copper is up almost 1% to recoup yesterday's loss, leaving it off 2.7% this week. July wheat is firm closing in on a nearly 2.5% gain for the week.  

Asia Pacific

It was unusual for China's Politburo to make a midday statement, but it did, and it gave the statement greater sway.  It pledged to meet economic targets (5.5% GDP this year), and many took it as a signal that more stimulus will be forthcoming.  Earlier this week, President Xi seemed to make similar allusions, that all-out efforts were needed and emphasized infrastructure projects.  Separately, talks with the US about on-site audits of Chinese companies also was supportive of Chinese tech companies that gave the Hang Seng an extra boost. China's mainland markets are closed until next Thursday.  Over the weekend, the "official" PMI will be reported.  The composite fell below the 50 boom/bust level in March and likely remained below there in April.

Japanese markets were closed today and re-open Monday, but then are on holiday again Tuesday through Thursday.  The economic highlight next week is the Tokyo CPI at the end of the week.  It is expected to jump sharply as last year's decline in mobile phone service costs drop out of the 12-month comparisons.  It is worth around one percentage point.  The Reserve Bank of Australia meets next week and that higher-than-expected Q1 CPI has fanned speculation of a small hike to begin the tightening cycle.  The market appears to have fully discounted a 15 bp move that would bring the cash target to 0.25%.  

The US dollar peaked yesterday near JPY131.25.  It is straddling the JPY130 area in the European morning.  Initial support is seen in the JPY129.40-JPY129.60 band.  The momentum indicators were stretched and the consolidation necessary. After BOJ Governor Kuroda's comments yesterday, the MOF's Suzuki seemed to ratchet up his rhetoric with the threat of taking "appropriate action" if necessary.  The Australian dollar is recovering from two-month lows set yesterday near $0.7050. It took out yesterday's high by a couple hundredths of a cent to $0.7165.  It needs to recapture the $0.72-handle to be anything of note.  The US dollar was extending its gains against the Chinese yuan, reaching CNY6.65 before the Politburo's statement.  It reversed lower and fell to CNY6.5850.  The offshore yuan tracked it closely. The greenback reversed from CNH6.6940 to CNY6.61 before steadying.  The PBOC set the dollar's reference rate at CNY6.6177, lower than the CNY6.6214 that the median in Bloomberg's survey anticipated.  

Europe

The eurozone Q1 GDP and April CPI were in line with expectations.  The economy expanded by 0.2% in the first three months of the year.  That puts year-over-year growth at 5.0%, up from 4.7% in Q4 21. Germany grew by 0.2%, after contracting by 0.3% in Q4 21.  France disappointed.  It was flat in Q1, and the median forecast (Bloomberg's survey) called for a 0.3% expansion.  It turns out that consumer spending fell 1.3% in March, rather than the 0.2% economists had expected.  Spain disappointed too, as it grew by 0.3% not the 0.6% anticipated.  Italy was the poorest of the Big Four.  It contracted by 0.2%, which was in line with expectations.  The string was only slightly eased by the upward revision in Q4 21 to 0.7% from 0.6%.  

The April CPI rose 7.5% year-over-year as the median in Bloomberg's survey forecast.  However, the details were a bit stronger than expected.  The monthly increase was 0.6% not 0.5%, and the core rate rose more than expected.  It now stands at 3.5% rather than the 3.2% expected, and up from 2.9% in March.  The swaps market has almost fully discounted a 25 bp rate hike at the July 21 ECB meeting.  This still seems somewhat aggressive.  While possible, and maybe even probable, it is not a done deal. So far, it only seems to be like a few hawkish members from the creditor members that have advocated such a course.  

Many European centers will be closed Monday for the May Day holiday.  The euro is being lifted by short covering ahead of the long holiday weekend and in the wake of the Chinese developments.  The euro reached almost $1.0470 yesterday and tested the $1.06 area today.  The $1.0630-$1.0650 area offers nearby resistance.  The euro has risen in only five sessions this month counting today.  This has stretched the technical reading.  It settled last week a little below $1.08, which seems quite far away now. Some consolidation ought not be surprising.  Sterling approached $1.2410 yesterday and today traded marginally through yesterday's high near $1.2570.  It will look like flattish consolidation unless sterling can push above the $1.2670 area.  This seems unlikely today or the start of next week when the UK markets are closed on Monday. The Bank of England meets next week and is expected to hike the bank rate by 25 bp to 1.0%.  Local elections will be held the same day.  

America

US Q1 GDP disappointed yesterday with a 1.4% annualized contraction.  On the one hand, it was a case of GDP math at work rather than a signal of the underlying strength of the domestic economy.  Specifically, the wider trade deficit took 3.2 percentage points off growth and slower inventory accumulation shaved growth by another 0.8 percentage points.  Real final sales to domestic purchasers rose 2.6% after a 1.7% pace in Q4.  This was the strongest since Q2 21.  It is probably the measure that Fed officials will put the most stock in when they announce a 50 bp rate hike next week.  Household demand was solid at 2.7% even if not as strong as expected.  It contributed almost 1.9 percentage points to growth.  Capex was also strong, rising 9.2%.  We have argued that the magnitude of the fiscal retrenchment is under-appreciated and the 2.7% decline in government spending (almost 6% decline by the federal government) took many economists by surprise.  

The contraction is most unlikely to be repeated in the current quarter, which is to say, the economy is not on the cusp of a recession.  The more likely scenario is a strong rebound this quarter before a more gradual slowdown materializes starting in H2.  In a larger sense, however, the GDP report is concerning insofar as it says something about the potential growth rate.  The sharp increase in employment (and hours worked) led to the production of less goods and services.  This warns of a decline in productivity and an increase in unit labor costs. It warns that trend growth may be falling, which means that price pressures can emerge earlier in the expansion.  

Yesterday's GDP report incorporated today's income and consumption figures.  The price deflators may attract the most attention, but the CPI report likely stole most of the thunder.  The headline deflator, which is what the Fed targets, is expected to have accelerated to 6.7% from 6.4%.  The core measure, which the Fed talks about, may have stabilized, or even slipped, from the 5.4% pace seen in February.  The employment cost index for Q1 will also be released.  It is expected to have risen by a little more than 1%.  The final University of Michigan consumer survey is unlikely to move the markets ahead of the weekend.  

Canada reports February monthly GDP.  The data is too historical to have much impact, but it is expected to have accelerated to 0.8% from 0.2% in January.  The Canadian dollar is benefitting from the risk-on mood.  The US dollar peaked yesterday near CAD1.2880, its highest level in a little over a month.  It began pulling back in the US afternoon yesterday and has continued today, falling to CAD1.2725, which roughly corresponds to a (38.2%) retracement of the rally from the April 21 low near CAD1.2460.  Below there, the next retracement (50%) is by CAD1.2670.  Mexico reports Q1 GDP today.  It is expected to have risen by around 1% after a flat Q4 21. The greenback reached almost MXN20.64 yesterday but settled back below our MXN20.60 target.  Support is now around MXN20.30, and break could spur a test on more formidable support near MXN20.20.  

 

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