Late Thursday evening, we talked at length about the bifurcated macro narrative wherein market participants careen from “reflation” days to “growth scare” days and back again.
Currently, we’re witnessing a nascent resurgence of the “reflation” theme, which made a comeback starting early last week following upbeat PMI data out of China, a better-than-expected ISM print stateside and decent March payrolls on Friday. All of that was enough to (temporarily?) overshadow still-pressing concerns about the trajectory of global growth – at least in the minds of some folks.
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Of course we’re hardly out of the woods yet, and the IMF’s downgraded global growth outlook was a stark (if wholly expected) reminder of where things stand, as was the WTO’s recent warning on trade.
Whether or not things inflect for the better depends in no small part on the success/failure of China’s stimulus efforts. “China is a key driver of the global economic cycle, and monetary and fiscal policy in China are likely to determine this cycle more so than the Fed”, Marko Kolanovic wrote last month, underscoring what is (and has been for a while) the most crucial macro story of them all.
There is arguably no point more critical than the notion that where things go from here hinges on China’s credit cycle and, relatedly, Beijing’s pulling of myriad monetary and fiscal policy levers in the interest not only of shoring up their own economy, but rescuing the global cycle from a brush with recession and disinflation.
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Well, on Friday, the market got welcome news in this regard.
First, China’s exports rebounded after the holiday, rising 14.2% YoY last month, suggesting external demand is firming (or is “resilient”, if you like) despite simmering trade tensions and myriad risks to the outlook. On the downside, imports fell 7.6%, raising questions about the durability of the domestic economy. Here’s the full visual breakdown, via Barclays:
(Barclays)
“We think the strong rebound [in exports] reflects both some stabilization in external demand and a calendar-based distortion from less disruption in March due to the earlier Chinese New Year and shorter NPC meeting this year”, Barclays writes, before cautioning that “given the calendar-distorted volatility in Q1 trade data (Mar: 14.2%, Feb: -20.8%, Jan: 9.3%), we are cautious against any over-optimism from this upside data surprise, and believe the recovery in external demand, if any, could still be fragile before trade uncertainties are meaningfully eased.”
When you look at things on a quarterly basis, exports grew 1.4% for Q1, which marks a deceleration from the 4% clip in Q4.
“The significant rebound in year-on-year exports growth was primarily due to the distortion related to the timing of Chinese New Year”, Goldman says, weighing in and adding that “potential back-loading of production to save tax costs before the VAT cut effective on April 1 could have distorted imports in March downwards.”
Caveats aside, Barclays says the better-than-expected export performance suggests upside risks to the bank’s Q1 growth forecast. They also say “the recovery in exports, strong rebound in credit, and expected improvement in IP (as evidenced by PMI, electricity output, etc) reinforce our expectation of a Q2 rebound in growth momentum [while] the continued contraction in imports suggests some fragility in the domestic recovery.”
But that wasn’t all we got on Friday. Also crossing the wires (just hours after the trade data) were hotly-anticipated credit growth numbers.
As a reminder, credit growth surged to a record in January when Beijing unleashed a veritable tidal wave, raising questions about Beijing’s commitment to not “flooding” the market. In February, there was a nauseating hangover, though, as credit growth crashed and analysts engaged in the usual effort to tease out holiday effects, and so on.
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Well, suffice to say March’s numbers were a beat. New yuan loans were 1.69 trillion yuan last month, versus estimates of 1.25 trillion. The range was 1 trillion to 1.5 trillion.
As for TSF, aggregate financing came in at 2.86 trillion yuan, a smashing beat versus the 1.85 trillion yuan median estimate from 27 economists. The highest estimate was 2.21 trillion.
M2 growth beat too, at 8.6% YoY, well ahead of the 8.2% estimate and up markedly from the 8% pace in February.
Also notable, trust loans and bankers’ acceptance bills jumped. Off-book lending rose a total of 82.4 billion yuan last month. Remember, this is always a delicate balance between squeezing leverage out of the labyrinthine shadow banking complex without choking off credit to the real economy.
“Monster prints in Chinese lending / financing data for March show that the ‘Chinese Credit Impulse’ has again exploded higher, which in conjunction with a huge YoY leap in March China Export data is seeing Global Bonds / Duration properly smashed”, Nomura’s Charlie McElligott wrote on Friday morning, before asking you the following question (emoji and all): “… who could have seen that coming? ; )”
The point there, is that all of this is good for the “reflation” story, as an inflection in China’s credit cycle (and the assumed concurrent “feed-through”, if you will, to the real economy) bolsters the outlook for global growth, just two weeks on from DM bonds seemingly presaging the apocalypse.
You’re reminded that there are pressing questions about the extent to which credit demand (not credit supply) is the problem in China. The monetary policy transmission channel remains clogged and some argue that until we get a benchmark cut from the PBoC (as opposed to RRR cuts and other various half-measures), that’s unlikely to change. It’s possible that if the outlook brightens, demand will pick up, especially if the trade spat with Trump is “resolved” (scare quotes there for a reason).
“Demand for credit might be improving as well on the back of better domestic sentiment, in turn driven by policy changes such as trade negotiations and support for private companies”, Goldman wrote Friday, after the credit data crossed, adding that “as inflationary expectations are rising, perceived real interest rates might be falling [and] the profit-boosting VAT cut may be one factor that conceivably increases credit demand.”
So, if you were looking for good news on the macro front headed into the weekend, the Chinese credit data will certainly suffice – although skeptics abound, as per usual.
