Summary:
- A lot of economic releases from China were released this week including foreign trade, inflation, new loans and industrial production or retail sales
- Germany is the largest drag on core industrial production in Europe
- US inflation likely to ease further, retail sales bounce back in May
No reassuring signals from China
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China had boosted exports to the US in May before a higher tariff rate came into effect on June 1. Source: Macrobond, XTB Research
Market observers were flooded with many economic releases from the Chinese economy this week and few of them offered a bit more upbeat tone. Let’s begin with the foreign trade data for May released on Monday showing a much higher than expected surplus, mainly due to a 8.5% YoY drop in imports (a sign of weak domestic demand). Exports grew 1.1% YoY compared to a 3.8% YoY fall seen in April and a lot of this could be ascribed to a surge in exports to the US as China had boosted sales to the US before a tariffs increase on $200 billion of Chinese goods took effect on June 1 (the chart above illustrates this effect). The second reading was inflation for May showing a steady pace of consumer prices growth at 2.7% in annual terms. As it was the case in the previous month, food prices were among the largest contributors to growth due to higher meat, eggs and vegetables prices (ASF virus kept taking its toll in May). However, the data did not show an urgent need to tighten monetary policy as the latest increase in prices has been caused predominantly by supply factors. Furthermore, the data on new loans showed a lower than expected increase, however, the trend remains upward as China weighs a need to support the economy against the sustainability of public finance.
Chinese fixed asset investments in manufacturing slowed down notably since the end of the past year. Source: Macrobond, XTB Research
Last but not least, today’s releases for May showed livelier retail sales rising 8.6% YoY and beating the consensus, weak industrial production rising just 5% YoY (5.6% was expected) and the disappointing pace of investments in fixed assets - 5.6% vs. 6.1% expected (YTD, YoY). Adding that the data are in nominal terms one may suppose that better retail sales may have been spurred more by higher prices than volume. What deserves even more attention is investments in manufacturing which have dropped since the end of 2018 from ca. 10% YoY to below 3% YoY currently. Note that this corresponds to the beginning of stagnation in the sector in Europe. It is by far not a reassuring signal in terms of a possible recovery in Chinese manufacturing in the months to come.
German manufacturing drags on European industrial sector
Industrial output in the Eurozone economy remained stagnant in April. Source: Bloomberg, XTB Research
Having known industrial production releases from European economies for April we may draw some conclusions. First and foremost, industrial production in the Eurozone remained sluggish falling 0.5% MoM, above the expected 0.4% MoM decline. Secondly, looking at the underlying trend of industrial output in the Eurozone economy, we focus on the 12-month average and its monthly seasonally adjusted changes, one may arrive at a conclusion that German was the major drag in April. Of course, in part this is due to the fact that Germany has the largest weight, however, it also needs to be noticed that German manufacturing remains disappointing and the only positive point there in recent months has been construction, which is excluded in the chart above. Although the Eurozone economy escaped from the outstandingly weak levels, there have yet to be convincing signals that a more widespread recovery lurks around the corner. What’s more, the latest Sentix index for Eurozne for June showed a fall to -3.3 from 5.3 in May. This gauge measures sentiment among private and institutional investors.
US inflation slows down, retail sales look quite well
US unit labour costs keep working well as a leading indicator for core price growth there. Source: Bloomberg, XTB Research
US May consumer price growth surprised to the downside as both headline and core gauges lost momentum. This fitted in the latest array of disappointments from the US economy and boosted odds for rate cuts in the months to come. On top of that, based on the data regarding unit labour costs one may expect US inflation to continue slowing down in the upcoming months. Anyway, we do not think the Fed may cut rates as soon as next week and even a July’s rate cut does not seem to be warranted in our view. However, if this is the case it would mean that the Fed became a hostage of financial markets once again. This is especially true when we take a look at today’s retail sales release for May bringing a bunch of solid numbers. Headline sales grew 0.5% MoM and the same increase was seen in core sales excluding autos and gasoline. Moreover, the retail sales report for April was revised broadly higher suggesting that upbeat sentiment and quite solid wage growth are still enough to encourage Americans to spend money (keep in mind that retail sales account for roughly half of overall consumer spending in the US).
