Why today's Philly Fed report is not as strong as it seems
Today's figures from the Philadelphia Federal Reserve appear bullish at first glance, but a closer examination reveals some mixed signals amidst a decidedly end-of-cycle overall tone.
Head of Macro Analysis
Chinese policymakers need to shift towards looser policy and stimulus efforts as markets turn lower amidst the US trade war, real estate declines, and projections of a growth slowdown. These five charts show that such a move is on its way.
China's credit impulse is still in contraction at minus 1.9% of GDP, but it is slowly rising from its lowest point since 2010. It is very likely that it will be back in positive territory sooner than we think. More easing is coming; easing liquidity and letting the RMB slide is only the first step. The next step could be a more proactive fiscal policy targeting infrastructure investments and a big loosening in property prices like in Q2 2015.
Credit impulse versus housing prices
Chinese real estate matters more than any other economic sector since it represents about 50% of Chinese investments and nearly 50% of China’s GDP, which implies it has a crucial impact on global GDP growth.
Since the beginning of the year, the sharpest price decline has been observed in first-tier cities where prices have dropped into negative territory in percentage change terms; the slowdown is more moderated in tier two and three cities. Due to easing by the People's Bank of China and a rising credit impulse that leads house prices by three quarters, we can safely assume that a recovery will happen in 2019 to support growth.
Shibor interest rates
More liquidity easing is widely expected which means that interest rates are set to decrease. The amplitude of the decline in Shibor interest rates could be similar to that of 2015 when China decided on a major loosening in property prices.
PBoC lending to commercial banks
Another sign that China is looking to re-stimulate the economy: the amount of funding that has been pumped into the banking system by the PBoC has again increased in June (reaching a total of 7.7 trillion CNY) after a decrease in April and a stabilisation in May.
Since 2016, state-driven investment has crashed while private investment has slightly rebounded. To face the impact of the ongoing trade war, China is likely to implement a more proactive fiscal policy focusing on increasing central and provincial government’s spending, especially on infrastructure investment in big cities, which would have little side effects. This would likely come in the second half of 2018.
This is not the end of the deleveraging process but only a defensive position to face ongoing economic and trade challenges.