Zero-Covid strategy whacks Chinese economic activity

Chris Scicluna
Emily Nicol

Risk appetite hit by weaker-than-expected Chinese data
Despite Friday’s bounce on Wall St. (the S&P500 rose 2.4% and the NASDAQ leapt 3.8%), it’s been a mixed start to the week for Asian markets, with confirmation of a bigger-than-expected slump in Chinese economic activity last month sapping sentiment. While the authorities announced on the weekend a modest cut to mortgage rates and a phased reopening of shops in Shanghai from today, China’s CSI300 fell 0.8% but the Hang Seng is currently little changed. And while data revealed a much bigger-than-expected rise in Japanese producer price inflation in April, the Topix closed barely changed on the day too. European equity markets have opened lower while US stock futures are pointing down too. And major government bonds have started the week higher, with 10Y UST yields down a few bps to back below 2.90% and euro area govvie yields 1-2bps lower too.

Zero-Covid strategy whacks Chinese economic activity; mortgage rate cut a modest response
Given the widespread restrictions in place last month, today’s Chinese economic activity data for April were always bound to be weak. But the hit was much greater than anticipated. Retail sales dropped 11.1%Y/Y – almost double the BBG median forecast decline of 6.6%Y/Y and the sharpest since the first lockdowns in March 2020 – to be down 0.2%YTD/Y. Contrary to the consensus of a modest rise, industrial production fell 2.9%Y/Y, to be up 4.0%YTD/Y, with manufacturing output down a steeper 4.6%Y/Y to be up 3.2%YTD/Y and autos down 31.8%Y/Y and 5.4%YTD/Y.

In addition, urban fixed asset investment slowed 2.5ppts to 6.8%YTD/Y, while property investment dropped 2.7%YTD/Y and residential property sales were down 32.2%YTD/Y – outturns that no doubt in part explained the authorities’ decision on the weekend to cut the lower bound on mortgage rates by 20bps to 4.4%. Finally, to cap a dreadful set of data, the urban unemployment rate rose a bigger-than-expected 0.3ppt to 6.1%, now 1.2ppts above last autumn’s trough and the highest since February 2020, with the youth jobless rate up to a record high of 18.2%. While the PBOC left the interest rate on its 1-year medium-term lending facility unchanged at 2.85% today, a modest reduction to its 1-year prime rate (currently 3.7%) is anticipated.

Japan’s PPI inflation jumps to a more-than 4-decade high, as the weaker yen exacerbated imported price pressures
Japanese PPI inflation came in above expectations in April, with prices rising at the strongest monthly pace in six months (1.2%M/M), to leave the annual rate up 0.3ppt to 10.0%Y/Y, the highest since December 1981. Prices of petroleum and coal products jumped 5.0%M/M, nonferrous metals (4.2%M/M) and iron and steel (3.6%M/M), with imported prices of such items exacerbated by the weaker yen. In yen terms, import prices surged by a record-10.8%M/M. So, producer raw material prices jumped 13.9%M/M, 65.5%Y/Y. But still limited evidence of these higher input burdens being passed significantly along the supply chain to consumers. Final producer consumer goods price inflation rose 0.6ppt to 4.6%Y//Y, a five-month high but still 0.4ppt lower than November’s peak. And this merely reflected imported price pressures, for which the annual rate was up almost 5ppts to 12.6%Y/Y, while the equivalent domestic rate eased ½ppt to 2.1%Y/Y, a thirteen-month low.

Japanese CPI inflation set to jump to 3-decade high, but GDP report to confirm economy contracted in Q1
Looking ahead, Friday’s CPI inflation numbers also expected to see headline inflation jump sharply in April (up 1.3ppt to 2.5%Y/Y, which would mark the highest for three decades), principally reflecting base effects associated with last year’s decision to slash mobile phone tariffs. Food inflation also likely to be higher and energy price pressures still significant. Wednesday’s Q1 GDP estimate expected to confirm the economy contracted as the latest pandemic wave weighed on consumption. Reuters Tankan survey for May (Wednesday) likely to reflect ongoing supply-side challenges for manufacturers but further improvements in services as the sector continues to normalise following Covid restrictions. Goods trade and machine orders reports due Thursday.

Euro area trade deficit to jump to record high today; ECB meeting account due later in the week
A relatively quiet start to the week in the euro area will bring March goods trade data, which – given the jump in energy prices and hit to exports to Russia are bound to show a further deterioration in the trade deficit to a series high, perhaps almost double February’s level of €9.4bn.

Looking ahead, likely of most interest will be Thursday’s ECB account from the Governing Council’s policy-setting meeting on 14 April. On that occasion it judged that, while future monetary policy decisions remained data dependent, the ECB’s asset purchases were still expected to come to an end in Q3 and the first rate hike could come shortly after that – of course, subsequent commentary from Governing Council members suggests that rate lift-off at the 21 July meeting is odds-on. Plenty of ECB policymakers will be speaking publicly before the release of the account, including President Lagarde tomorrow.

In terms of economic data, arguably the most noteworthy release will be European Commission’s flash consumer confidence indicator for May on Friday. With inflation at a euro-era high, wage growth still subdued and uncertainty about the global economic outlook elevated, expect household sentiment to have remained extremely subdued this month, with the indicator forecast to be little improved from April’s two-year low (-22.0). Tomorrow will bring an updated reading for Q1 GDP in the euro area (Tuesday) – expected to confirm that growth slowed slightly to 0.2%Q/Q, from 0.3%Q/Q in Q4 – alongside euro area employment figures for the first quarter. Final euro area inflation data for April (Wednesday) are expected to confirm that headline HICP inflation increased 0.1ppt to 7.5%Y/Y, with core inflation up a steeper 0.6ppt to 3.5%Y/Y, both series highs.

Bailey to be grilled in Parliament today; UK labour market, inflation and retail sales data due this week
Today’s UK focus will be the BoE, with Governor Bailey and other MPC members – who are increasingly being demonised by the ruling Conservative party for the UK’s economic woes – set to testify at Parliament’s Treasury Committee. Coming days bring plenty of top-tier UK data too, including on the labour market (Tuesday), CPI inflation (Wednesday) and retail sales (Friday). Given the 54% hike in household energy bills last month, most focus seems bound to be on inflation, with the headline CPI rate expected to jump more than 2ppts to above 9%Y/Y for the first time since the series began in 1988. Of course, this will be driven by energy inflation, which we expect to have leapt 30ppts to above 55%Y/Y to account for roughly 40% of total inflation. Food inflation is likely to have risen to the highest in more than a decade. But with services and non-energy industrial goods inflation also set to rise further, not least due to persisting supply bottlenecks, we expect core inflation to rise an above-consensus 0.7ppt to 6.4%Y/Y.

Meanwhile, although the latest data are likely to point to ongoing tightness in the labour market due to the sharp drop in labour force participation since the onset of the pandemic – the unemployment rate is likely to remain unchanged at 3.8%, a rate that was last lower in the mid-1970s – real wage growth is likely to remain firmly in negative territory despite strong nominal pay growth. And with consumer confidence likely to have remained close to record lows (latest survey due Friday), and retail surveys signalling a poor performance at the start of Q2, we would expect Friday’s retail sales figures to post a further decline in April, with consensus expectations for a drop of around ½%M/M.

US retail sales to have been boosted by higher prices, IP growth to have slowed slightly on supply constraints
Key US releases this week include April’s retail sales and industrial production data (tomorrow). While new vehicle sales will be supportive, lower petrol prices could lead to a decline in sales at gasoline stations. And although Daiwa America’s team expect a modest rise in nominal sales (by a below-consensus 0.6%M/M) not least due to higher prices, the associated hit to households’ budgets will be a constraining factor on spending. IP forecast to rise for the fourth consecutive month in April (½%M/M). Below-average temperatures in April could lead to a pickup in utility output, but growth is likely to be softer than in February and March perhaps reflecting intensified supply bottlenecks. Plenty of Fed speak this week, with New York President Williams in action today and Chair Powell set to be interviewed at a Wall Street Journal event tomorrow. 

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