China’s Q1 GDP growth falls slightly short of expectations

Chris Scicluna

Wall Street hits record high as US data impress yet bond yields fall; Asian markets eventually post gains despite Chinese GDP miss
A plethora of impressive economic reports – notably, a 9.8%M/M surge in retail sales, a sharp decline in initial jobless claims and upbeat manufacturing surveys from the NY and Philly Fed – drove Wall Street to a new record high on Thursday. The S&P500 increased 1.1% and the Nasdaq 1.3%, with sentiment further underpinned by an inexplicable decline in Treasury yields despite the upbeat data. Indeed, the 10Y yield fell to a 1-month low of 1.58% – and traded below 1.53% at one stage – which weighed on financial stocks despite positive reports from Citigroup and Bank of America.

US equity futures have dipped a little during an Asian session in which most focus have been on China’s Q1 GDP report. While China’s growth was a little below expectations – more so in the quarter after taking account of revisions to Q4 – Chinese equity markets eventually picked up, with the CSI300 up 0.5%. And most bourses elsewhere in the region have done likewise. However, in Japan, where the latest Reuters Tankan painted an increasingly positive picture of conditions in the manufacturing sector, the TOPIX rose just 0.1%. While JGB bond yields were also little changed, as usual Aussie and Kiwi bond yields were dragged lower by the rally in USTs, even as New Zealand printed its strongest manufacturing PMI report on record.

Chinese GDP grows 18.3%Y/Y in Q1, slightly below expectations
The focus for investors in the Asian time zone has been China’s release of the national accounts for Q1, together with key activity indicators for March. After growing 3.2%Q/Q in Q4, revised up from 2.6%Q/Q previously, the economy grew just 0.6%Q/Q in Q1. This soft quarterly result accords with the relatively weak PMI readings seen during the first two months of the quarter, which followed the re-imposition of restrictions in some cities and lower-than-usual travel during the LNY holiday period. Looking ahead, given the significant rebound in the PMIs in March, the economy is likely to perform more impressively in the current quarter, as with other countries benefitting from demand generated by the US fiscal stimulus.

Despite the soft quarter, given base effects – the economy had contracted 6.9%Y/Y in Q1 last year – annual growth picked up to a record 18.3%Y/Y from 6.5%Y/Y previously – just 0.2ppts below surveyed expectations. According to the NBS, growth in service sector activity picked up to 15.6%Y/Y from 6.7%Y/Y previously, whereas growth in manufacturing sector increased to 24.4%Y/Y from 6.8%Y/Y previously (this follows declines of 5.2%Y/Y and 9.6%Y/Y respectively last year).

China’s IP growth disappoints in March but retail sales rebound very strongly; capex much as expected
Turning to China’s monthly indicators, surprises in March were much as signposted in the trade data earlier this week. Indeed, growth in industrial output disappointed consensus expectations with an advance of “just” 14.1%Y/Y in March, following the decline of 1.1%Y/Y a year earlier. For the quarter as a whole industrial output increased 24.5%Y/Y – output had already begun to recover in March last year – following an 8.4%Y/Y decline a year earlier. In the detail, manufacturing activity grew 15.2%Y/Y – rebounding from a 1.8%Y/Y decline a year earlier – whereas mining and quarrying activity grew just 2.9%Y/Y. All major industries reported solid growth that was inflated by weak base effects, with the standouts being autos (40.4%Y/Y), non-metallic minerals (24.5%Y/Y), electric machinery and equipment (24.1%Y/Y), fabricated metals (22.5%Y/Y) and general purpose equipment (20.2%Y/Y). Power generation increased 13.9%Y/Y following a 1.6%Y/Y decline a year earlier.

Turning to the demand side of the Chinese economy, consistent with this week’s surprising strong import data, growth in retail spending significantly beat market expectations. Indeed, growth of 34.2%Y/Y – albeit following a drop of 1.8%Y/Y a year earlier – was more than 6ppts above the consensus expectation. Not surprisingly, growth was led by a whopping 91.6%Y/Y rebound in catering services following a near 47%Y/Y decline last year (even so, the level of spending was less than 4% higher than in March 2019). Spending on apparel – which like in other countries had slumped during the first wave of the pandemic – increased 69.1%Y/Y, while spending on autos increased almost 49%Y/Y.

Investment spending on non-rural fixed assets increased 25.6%Y/YTD in March, which was fractionally weaker than market expectations. And while this was down from 35.0Y/YTD in February, this reflects the fact that investment spending had already begun to recover last March. Private sector investment increased 26.0%Y/YTD, very similar to the 25.3%Y/YTD increase in state sector investment. Manufacturing sector investment grew 29.8%Y/YTD, although this does follow a 25.2%Y/YTD decline a year earlier. Property development increased 25.6%Y/YTD, which was somewhat below the consensus expectation but an improvement on the 7.7%Y/YTD decline recorded a year earlier. Finally, after rising last month – probably partly reflecting residual seasonality associated with the LNY holiday – the urban unemployment rate declined 0.2ppts to 5.3% in March, thus remaining just 0.1ppts above the recent December low-point.

In other news, today there were further signs that Chinese home prices have begun this year on a firmer note. New home prices across China’s 70 largest cities increased 0.41%M/M – the most since August – causing annual growth to lift 0.3ppts to 4.4%Y/Y. Existing home prices increased 0.40%M/M causing annual growth to lift 0.4ppts to 3.3%Y/Y, but with prices in so-called first-tier cities rising a much stronger 1.1%M/M and 11.4%Y/Y (strengthening momentum was especially evident in Beijing and Guangzhou).

Japan’s Reuters Tankan points to increasingly positive conditions in manufacturing, while unsurprisingly non-manufacturing continues to lag
Today’s Reuters Tankan indicated that both manufacturing and non-manufacturing firms perceived an improvement in business conditions over the past month, with the manufacturing sector going from strength to strength – likely reflecting demand stimulated by the well-performing US and Chinese economies. Encouragingly, the overall diffusion index (DI) for manufacturers increased a further 7pts to 13 in April, marking the best reading since February 2019 (and now well above the long-term average, which sits around zero). The forecast DI – which measures expected business conditions three months ahead – declined 2pts to 13, however, indicating that respondents expect business conditions to remain broadly stable in the near term. The sector detail pointed to significantly reduced pessimism in the textiles and paper industry, while conditions facing manufacturers of autos and various classes of machinery became even more positive than last month. Less positively, the steel and metals sector grew more concerned about business conditions, which we imagine likely reflects the rising cost of raw materials.

By contrast, the overall non-manufacturing DI increased just 2pts to -3 in April. That said, this still amounts to the best reading since February last year, when the index stood at 15 just prior to the onset of the pandemic. The forecast DI fell 2pts to 2, indicating that firms expecting a slight improvement in business conditions over the next three months but in slightly fewer numbers than was the case last month. However, it is worth noting that the relatively small movements at the aggregate level hide some large changes at the industry level that may well reflect the recent rise in coronavirus cases and the likelihood of further restrictions on activity. The previous month’s marked lift in optimism in the retail sector was more than erased and respondents in the transport sector grew more despondent. Meanwhile, pessimism declined markedly in the wholesale sector and the already high levels of optimism in the information services industry grew further with its DI index rising 22pts to a 5-year high of 64.

Leap in EU new car registrations in March; euro area goods trade and final CPI data due
As had already been flagged by the data from the larger countries, this morning’s European new car registrations data confirmed a rebound last month, with striking growth of 87.3%Y/Y in the EU flattered by base effects from the collapse this time last year as well as reopening from lockdowns in certain member states. Indeed, the level of 1.062mn was the highest since last July. In the euro area, growth of 95.5%Yto 896.7k was even stronger, although the weakness in the first two months of the year left new car registrations up just 2.7%YTD/Y. At the country level, registrations in France, Spain, Austria and Greece were all more than double the number a year earlier. And sales in Italy were up almost 500%Y/Y. Registrations in Germany, however, were up just 35.9%Y/Y to be down 6.4%YTD/Y. But surveys point to decent growth in car sales in the current quarter and beyond.

Looking ahead, today brings February’s trade data from the euro area alongside the final March CPI data. The latter are highly likely to confirm the flash estimates whereby headline inflation rose 0.4ppt in March to a fourteen-month high of 1.3%Y/Y due to shifts in energy prices but the core rate remained unchanged at 0.9%Y/Y.

US consumer sentiment and housing data likely to be firmer today
The week’s US diary concludes today with the release of the preliminary findings of the University of Michigan’s consumer sentiment index for April and housing starts and building permit data for March. Given improving labour market conditions, recent stimulus payments and new highs in the stock market, Daiwa America’s Chief Economist Mike Moran expects the headline sentiment index to increase to a post-pandemic high. Meanwhile, housing starts and permits should record a large rebound from their severely weather-impacted February readings. Aside from economic data, today will feature further earnings reports from the financial sector, including from Morgan Stanley and Bank of NY Mellon.

Kiwi manufacturing PMI surges to record high in March
Consistent with the strong outcomes seen elsewhere around the globe, New Zealand’s BNZ-Business NZ manufacturing PMI made for very positive reading in March. Indeed, the headline index surged 9.6pts to 63.6, marked the strongest reading in the 19-year history of the series, and lifted the 3-month average to the highest level since 2004. All five sub-indexes increased this month, with the new orders index rising a stunning 14.5pts to a record 72.5. The production index increased 8.4pts to 66.8 and the employment index increased 3.3pts top 53.5.

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