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Risk appetite's sensitivity to global activity indicators, and especially those in China, was highlighted again on Friday. The equity market advance and rise for sovereign yields was driven by the step-up in loan granting in China and the rebound for exports, two favourable signals for growth. This confirms the world economic growth cycle will benefit from both a trade agreement (further positive statements this weekend) but also the Chinese government's measures implemented in recent months. The impact will be notable in China as of Q2 and in the rest of the world in the second half of the year. In the meanwhile, the resilience of activity will remain dependent on consumption and hence household purchasing power (impacted by price of petrol again, but a situation we view as temporary). The level of household confidence is very high in the US, while Donald Trump, in electoral campaign mode, is looking to strengthen growth and the standard of living for Americans. Trade agreements are needed (note the resumption of talks with Japan and the validation of the EC mandate in Europe today), but Trump is now putting increased pressure on the Fed, which creates a risk of its independence to political power.
Chinese growth underpins financial markets. The publication last Friday of good Chinese data resulted in renewed appetite for risk on financial markets with, notably, the rebound in cyclical sectors particularly exposed to China. Investors remain very sensitive to the question of world growth momentum as it is largely dependent on Chinese activity. Support measures undertaken by the government are beginning to pay off as illustrated by the sharp acceleration in new loans issued in March (+13.8% y-o-y vs. +12.8% in February). Furthermore, the authorities' intention to halt the debt reduction campaign which has weighed heavily on growth in past months is also reflected in shadow banking (financial intermediation conducted outside the framework of regulated bank activities) which has stabilised since the start of the year.
Progress made on the trade front will serve as another significant support factor for growth, while exports are showing the first signs of a rebound. According to the press, Washington is prepared to scale back its demands concerning the end of Chinese industrial subsidies to ensure that a deal can be signed rapidly (we think by June). Steven Mnuchin has declared that negotiations could enter the home stretch with two conference calls scheduled this week, but the question of lifting US customs duties as requested by Beijing still remains to be discussed (we think Washington will maintain customs duties on USD50bn-worth of technological products).
A recovery in Chinese growth in Q2-2019 will benefit the H2 performance of its trade partners, especially Germany, where the industrial sector is heavily exposed to China. According to sources close to the German government, the growth forecast for 2019 could be revised down (to 0.5% from 0.8%) over the next few days.
Donald Trump takes aim at the Fed once again. The US president sent a series of attack tweets on Sunday to the effect that the Fed, by doing its job poorly, had prevented the US stock market from rising by an additional 5,000 to 10,000 points, and held GDP growth at 3% rather than 4%, all without inflation. These attacks are another illustration of Mr Trump's determination to begin campaigning for re-election, even if this means raising concerns about the Fed's independence (Mario Draghi had expressed his concerns on this subject at the G20 on Saturday). The US President's goal is apparently also to curb upward pressure on the dollar, which, in spite of falling fears about protectionism, is at an elevated level that Donald Trump views as damaging to the economy. In relative terms, the strength of the US economy lowers the fall in value of the greenback, especially as consumption is holding up, which limits the risk of a sharp drop in growth (consumer confidence remains elevated, as illustrated by the University of Michigan survey published Friday confirming the end of the air pocket at the start of the year). This will enable the Fed to raise its benchmark rates again, but only next year, as it will first take the time to ensure indicators such as household inflation expectations are improving (they fell in April to +2.3% vs +2.5% in March).
Today, we will be looking at: renewed trade talks between the US and Japan; the Empire manufacturing activity index for April in the US at 14:30; validation of the EU mandate for trade talks with the US at the meeting of European agriculture ministers.
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Jordan Allouche | Adrien Régnier-Laurent | Anne-Lise Cornen |
+33 1 53 48 76 78 | +33 1 53 48 80 42 | +33 1 53 48 80 84 |
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