Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: The breather provided by tech and growth led rallies in the U.S. is dampened by weakness in China’s credit, industrial production, fixed asset investment and retail sales data. This Friday’s Japan nationwide CPI is likely to inform if the recent strength in the Japanese Yen against dollar and other crosses has more to go.
What’s happening in markets?
U.S. equity market rebound improves the tone for the start of this week. Having finished a six weeks in a row of falling, S&P500 and NASDAQ 100 managed to finish last Friday with 2.4% and 3.7% gains respectively. Tech and growth outperformed value stocks. The Philadelphia Semiconductor Index gained 5%. The market is taking a breather in the midst of a bunch of negative factors including a hawkish Fed, persistent inflation and global growth slowdown or even recession fears.
Australian dollar fell below 0.69 after weak China data. Following the rally from last Friday, AUD initially rallied to 0.696 but reversed after China released declines in April industrial production and retail sales, triggering fear of further retracement of industrial metal prices.
Mainland China and Hong Kong stocks pared early gains on weak China data. Hang Seng Index (HSI.I), Hang Seng TECH (HSTECH.I) and CSI300 (000300.I) opened higher on news that China having cut the mortgage interest rate floor for first-home buyer and optimism about a gradual lift of lockdown in Shanghai. The markets lost momentum as China released that industrial production fell 2.9% and retail sales fell 11.1% YoY in April, both being worse than market expectations.
India bans export of wheat that sent wheat futures up more than 5% in price.
What to consider?
China’s credit data was much weaker than expectation in April. New aggregated financing fell sharply to RMB910 billion in April (consensus: RMB2,200bn; March: RMB4,653 bn). The growth of outstanding aggregate financing dropped to 10.2% YoY in April from 10.6% in March. New RMB loans slumped to RMB 645 billion (consensus RMB1,530 bn; March RMB3,130bn). Mortgage was weak with outstanding mortgage loans contracted RMB61bn.
China cut the floor of mortgage rates. The People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly announced a cut of 20bps of the floor mortgage rates for first-home byers to 20bps below the 5-year long-term prime rate (LPR which is currently 4.6%). In other words, the mortgage floor is reduced from 4.6% to 4.4%. However, most banks are currently charging a premium to the LPR and the average mortgage rate for first-home buyers is about 5.2%. The impact of the cut of the floor will depend on if banks are willing to reduce the premiums that they charge the home buyers.
The PBoC keeps its policy rate unchanged. In setting its policy 1-year Medium-term Lending Rate today, the PBoC keeps it unchanged at 2.85% despite some analysts have called for a cut after the weak April credit data. It is our view that the room for the PBoC to cut rates is limited.
China’s April industrial production, retail sales and fixed asset investment were weaker than market expectations. April industrial production fell 2.9% YoY (consensus +0.5%, March: +5%). The weakness was led by the manufacturing sector which declined 4.6% YoY in April. Passenger car production plunged 43.9% YoY. The mining sector’s growth also slowed to +9.5% YoY in April from 12.2% in March. Processed materials such as cement and steel products slumped 18.9% and 5.8% YoY respectively. Fixed asset investment came at +2.3% YoY in April, down from March’s 7.1% YoY. Although the Chinese authorities are pushing for infrastructure construction, the April data in infrastructure investment growth slowed to +4.3% YoY from March’s +11.8% YoY. It the above is not bad enough, April retail plunged 11.1% YoY (consensus -6.6%; March: -3.5%). All in all, the bunch of economic data from China for April was very weak.
Japan’s PPI rose faster in April at the rate of 10.% YoY (consensus +9.4%; March revised to +9.7% from +9.5%). Core PPI came at +1.2% YoY (consensus +0.9% from +0.8%). Japan is releasing nationwide CPI data on Friday. Bloomberg survey has 2.5% for headline CPI and 2.0% for CPI ex fresh food. The CPI data is the focus of the market and may shape the expectations about BoJ’s stance on monetary policy.
Shanghai’s Covid situations have improved with 938 new cases for Sunday, the first time falling below 1,000 since March 23. It was also the second day that the municipality reporting no new cases outside quarantine. Shanghai is gradually allowing some stores to open for business and expects to gradually resume public transportation from May 22.
A leading Chinese Communist Party ideology publication, QSTheory publishes in its portal a speech from President Xi which calls for common prosperity, redistribution of income, regulating capital’s predatory behaviours and monopolistic activities.
Potential trading ideas to consider?
USDJPY may have more to the downside (127) in near-term.
Key economic releases this week:
Key earnings release this week:
For a global look at markets – tune into our Podcast.