China’s export growth unexpectedly picks up

Chris Scicluna

Equity markets continue higher; bond yields nudge up ahead of today’s US CPI report
Faintly echoing Friday’s price action, both Wall Street and UST yields rose together again on Monday. At the close, the S&P500 had ground out a 0.35% advance to set yet another fresh record high, while the 10Y UST increased 1bp to 1.37%, erasing an earlier rally that had occurred during the European session while crude oil was on its session lows. A relatively quiet day in FX markets left the greenback fractionally firmer, but with markets trading with a mostly positive tone in Asia that gain has since been unwound.

Turning to the Asia-Pacific region, with neither US equity futures nor Treasuries moving much since the close, it has been another positive day for equities across most of Asia. In Japan, on a day devoid of local data, the TOPIX has built on yesterday’s 2.1% rebound with a further 0.7% advance, lifting the index to its best close since mid-June. Stocks have increased similarly in South Korea and Singapore, and even more solidly in Hong Kong (currently up 1.7%). However, despite China’s exports and imports far surpassing consensus expectations in June, the CSI300 has struggled to make headway today with investors perhaps awaiting the more definitive assessment of the economy that will come with this Thursday’s Q2 GDP release. Australia’s ASX200 has also underperformed with a modest 0.2% gain, with the latest NAB survey pointing to a softening of business conditions from the record highs reported in May. That softening doubtless reflected reaction to Sydney’s virus outbreak, for which new case numbers dropped to 89 today from 112 a day earlier. But with all of the activity indicators remaining well above average levels, and pricing indicators rising to new highs, the 10Y AGCB has increased 2bps to 1.33%.

China’s export growth unexpectedly firms in June; import growth slows due to base effects, but still firmer than expected
Ahead of Thursday’s Q2 GDP report, the focus in China today was on the release of merchandise trade data for June. The good news is that both export and import growth proved much stronger than the consensus had expected, with growth in exports unexpectedly picking up when a decline in growth was forecast by analysts.

Turning to the detail, in dollar terms, exports grew 32.2%Y/Y in June, up from 27.9%Y/Y in May and about 9ppts above the consensus expectation (given the strengthening yuan, exports grew a slower 20.2%Y/Y in local currency terms). Of course, these growth rates are inflated by base effects associated with the first wave of the pandemic, which weighed heavily on China’s exports in the first half of last year. Perhaps more meaningfully, therefore, exports in June were a very creditable 32.5% higher than two years earlier. Moreover, exports grew 14.0%Q/Q in Q2. Exports to the US increased 17.8%Y/Y, down from 20.6%Y/Y in May and marking the slowest pace since July last year. Reflecting the recovery underway in the euro area, exports to the EU grew 27.2%Y/Y whereas exports to the UK grew just 9.2%Y/Y. Growth in exports to ASEAN countries slowed to 33.1.6%Y/Y, whereas growth in exports to Japan picked up to 26.0%Y/Y.

Meanwhile, the news regarding imports was positive for China’s trading partners. While growth in imports slowed to 36.7%Y/Y in June from 51%Y/Y in May, a decline had been expected given that imports last May had been barely above the pandemic low-point. Moreover, the slowdown was around 7ppts less than analysts had expected, with the level of imports rising to a record high in June. Stripping out base effects associated with the onset of the pandemic, imports in June were 41.2% higher than two years earlier. Imports also grew 12.5%Q/Q in Q2. Continued robust growth rates continued to owe in part to the rebound in commodity prices, with imports of crude oil up almost 63%Y/Y and imports of iron ore up more than 91%Y/Y. Imports from the US grew 37.6%Y/Y, but this was nonetheless the slowest pace since November last year. As a result, China’s bilateral surplus with the US widened slightly to a seven-month high of $32.6bn in June (China’s overall surplus widened to $51.5bn from $45.5bn in May). China’s imports from the EU increased 34.1%Y/Y and imports from the UK grew 49.4%Y/Y. Imports from ASEAN nations grew 33.7%Y/Y while imports from Japan grew a somewhat slower 21.4%Y/Y. Meanwhile, despite the fractious political relationship of late, imports from Australia grew 53.5%Y/Y, lifting China’s bilateral deficit with Australia very slightly to an unmatched $28.3bn.

German and French inflation data for June offer no surprises, aligning with flash estimates
Another relatively quiet day for euro area releases nevertheless saw the release this morning of final June inflation figures from Germany and France, which aligned with the preliminary estimates to suggest that the euro area figures due at the end of the week will do likewise. In particular, the national measure of German CPI inflation eased 0.2ppt from May’s near-decade high to 2.3%Y/Y and the EU HICP measure fell back 0.3ppt from a three-year high to 2.1%Y/Y. The decline was in part due to lower energy inflation, down 0.6ppt albeit still high at 9.4%Y/Y. Services inflation was also softer, down 0.8ppt to 1.7%Y/Y due to lower inflation of recreation and culture (down 2.6ppts to 1.0%Y/Y) in part reflecting prices of package holidays. So, while non-energy industrial goods inflation was steady, core inflation (excluding food and energy) on the national measure fell back 0.2ppt to 1.7%Y/Y.

In France, meanwhile, the headline inflation rate edged slightly higher in June, with the national measure up 0.1ppt to 1.5%Y/Y and EU HICP measure up 0.1ppt to 1.9%Y/Y. The increase reflected a big rebound in manufactured goods inflation (up 0.8ppt to 0.7%Y/Y) due most notably to a sharp jump in clothes inflation (up 3.1ppts to 2.9%Y/Y) due not least to shifts in the timing of summer discounting. In contrast, inflation of services (due to lower prices of healthcare and airfares among others), energy and food slipped back slightly in June. As such, core inflation on the national measure rose 0.2ppt to 1.1%Y/Y.

UK retail sales monitor signals firm spending in June after strong start to Q2
After a strong first couple of months of Q2 – according to the official ONS data, retail sales jumped 9.2%M/M in April before easing back just 1.4%M/M in May – the latest BRC retail sales monitor released overnight pointed to another firm month for spending on the UK high street in June. According to the survey, food sales begun to slow but non-food sales were strong last month. Clothing and footwear sales were reportedly strong early in the month while the European football championships provided a boost for sales of TVs and beer. Growth in total sales slowed 18ppts to 10.4%Y/Y, predominantly reflecting base effects from the sharp movements a year earlier.

BoE FPC sees continued near-term downside risks to economic activity as government support is gradually phased out
Despite continued evidence of a strong rebound in economic activity in the second quarter and improved outlook, in its latest Financial Stability Report released this morning, the BoE flagged the downside risks to economic activity, not least those posed by the pandemic. And with government support for the economy being phased out gradually from the current month, the BoE judged that households and businesses are likely to need continuing support from the financial system even as the economy recovers. As such, the FPC stated that it expects banks to use all elements of their capital buffers as necessary to continue to support the economy through the recovery. It emphasised that banks should not defend capital ratios by cutting lending. And to help the banks have sufficient leeway to continue to provide the necessary support, the FPC stated that it expects to maintain the UK countercyclical capital buffer rate at 0% until at least December 2021. Given the usual 12-month implementation lag, that means that any subsequent increase would not be expected to take effect until the end of 2022 at the earliest.

CPI in focus in the US today, with core inflation likely to set a new high
Today’s US diary features one of this week’s most important economic releases, namely the CPI report for June. Daiwa America’s Chief Economist Mike Moran expects another solid 0.5%M/M lift in the headline CPI, leaving annual inflation close to last month’s 5.0%Y/Y pace. And with the economy continuing to recover from the pandemic, he expects further price normalization and robust demand to drive a 0.4%M/M lift in the core index, which should raise annual inflation on that measure to a new high of 4.0%Y/Y. While the CPI will dominate attention, today will also bring the release of federal budget data and the latest NFIB small business survey. In addition, bank earnings will be a key focus for investors, with Goldman’s Sachs and JP Morgan Chase both reporting their latest quarterly results today.

Aussie business survey retreats from record highs as virus outbreak weighs on sentiment
Today the NAB Business Survey pointed to a pullback in a number of key activity indicators from last month’s record highs, which was predictable in light of the coronavirus outbreak in Sydney. The headline confidence index fell 9pts to a six-month low of 11 in June while the more important business conditions index fell 11pts to 24. Encouragingly, while marking a four-month low, the latter reading remains a considerable 18pts above the long-term average. This month firms were less ebullient about profits, capex and employment, although each of these measures also remained well above average levels (in the case of employment, 15pts above average). Interestingly, in contrast to the softening seen in the survey’s activity indicators, the pricing indicators hit a new high this month. Indeed, firms reported that labour costs had increased by 1.9% over the past three months, while final product prices were said to have increased 1.5% – the latter the most July 2000. It remains to be seen whether these very elevated readings will be reflected in the CPI, which is next due for release on 28 July – just a week before the RBA’s next policy meeting.

In other Aussie news, after declining 3.9% the previous week in response to the coronavirus outbreak in Sydney, somewhat surprisingly, the ANZ-Roy Morgan index of consumer confidence rebounded 2.0% last week, with respondents more upbeat about both the near- and long-term outlook for the economy.

Kiwi house sales and prices retain momentum in June
Ahead of tomorrow’s RBNZ policy review, the REINZ housing report for June pointed to a residential real estate market that has retained considerable momentum despite RBNZ and government measures attempting to slow activity (and especially prices). The number of sales increased 6.2%Y/Y, and constituted the most active June since 2016. Meanwhile, the house price index – which is corrected for compositional changes in sales – increased 0.9%M/M and 29.8%Y/Y, with the median property selling in just 31 days.

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