If you were wondering what Wall Street thinks of China’s blockbuster activity data released to much fanfare on Wednesday, the answer, generally speaking, is that it “confirms” an inflection.
You may quibble with that, but recently, we’ve witnessed beats on both the official and Caixin PMIs, better-than-expected export growth (despite lackluster imports), blowout credit growth numbers and now beats on GDP, retail sales and IP.
Fudged data or no and lingering holiday distortions aside, at a certain point the narrative will become reality if enough people start to believe it, especially to the extent good news ignites domestic animal spirits, catalyzing more demand for credit which would help unclog the monetary policy transmission channel.
The above comes with the usual caveats, though. It’s possible that things take another brief turn lower before inflecting sustainably in the back half of the year.
“Q1 GDP growth surprised to the upside, driven by a sharp rebound in March activity, which looks unsustainable to us”, BNP wrote Wednesday, adding that they expect growth will merely stabilize in Q2.
“A mild upswing is likely to happen in Q3, on the favorable base effect, a possible trade deal with the US and the lagging effect of stimulus”, the bank continues, adding that “growth stabilization, buoyant sentiment and tax cuts yet to fully kick in mean more stimulus is unwarranted.”
That latter bit underscores the “downside” (if that’s how you want to characterize things). As detailed here extensively on Wednesday morning, some are concerned that a lack of further stimulus from Beijing threatens to undermine global green shoots. Some of those worries may be allayed by reports that China is already working on new measures to boost consumption.
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For their part, Barclays is out changing their call both for GDP and monetary policy in light of the new numbers. “While seasonal factors have driven volatility in the monthly data, the strong rebound in sequential GDP growth… confirmed a clear cyclical upturn, in our view”, the bank says, on the way to ascribing the inflection to “greater impact from the government’s stepped-up countercyclical policies in Q4, Chinese housing market indicators including house and land prices, home sales in value and volume terms, and housing starts recover[ing] across the board, and external demand and exports far[ing] better than expected.”
The bank is raising their 2019 GDP forecast to 6.5%. That’s the first revision in six months. They also hiked their 2020 forecast to 6.2% and (very) notably, Barclays no longer expects a benchmark cut. To wit:
On monetary policy, we now forecast reduced RRR cuts (2 RRR cuts of 50bp each, down from 200bp earlier), and no benchmark interest rate cuts. We think the PBoC has shifted to a more neutral stance in April amid improving growth, upward CPI inflation pressures (pork-price led), and renewed asset bubble concerns (equity and housing prices following the five RRR cuts in the past year).
That’s from Jian Chang, and you might remember that her call for a possibly imminent cut to the benchmark rate was big news back in February. The fact that she now sees that as unnecessary (or at least unlikely) is a testament to the brightening outlook among analysts.
Goldman largely echoes the above. After remarking that the strength of the March activity data is likely down to Chinese New Year distortions, the bank notes that 1Q growth figures do not suffer from the same issue. “We can be quite certain that sequential activity growth has already rebounded from the trough in 4Q 2018 [and while] there are some uncertainties in terms of the potential impact of the tax cuts on reporting, there appears to be no question that sequential growth recovered in 1Q.”
The bank attributes this to “proactive cyclical monetary policy, fiscal policy, and administrative policies”, as well as progress on trade talks, a less onerous “inspection burden” on the public sector and, of course, “support for private companies and SMEs which facilitated loosening and boosted confidence.”
Does Goldman agree that this means less stimulus? Well, yes, but with a caveat. Here’s the “yes”:
As activity growth momentum, inflationary pressures, and equity markets have all been on the rise, the government’s policy stance is becoming less supportive as suggested by the latest statements from the PBOC. Specifically, there seems to be no urgency to cut RRR in the near term and interbank rates have gone higher, likely a reflection of the preference of the central bank.
And here’s the caveat:
Having said that, at least before the 70th anniversary of the founding of the PRC on October 1st this year, we see a “policy put,” i.e., any significant correction in the economy and market will likely result in further policy loosening.
BofAML broadly agrees. “Growth data confirmed the worst in this cycle is already behind us”, the bank wrote Wednesday, before noting that “given already very strong money and credit results and still firm growth, we think policy makers will unlikely keep intensive easing measures in place for very long.”
So, which do you prefer? Ongoing signs of fragility that suggest the engine of global growth and trade is teetering on the verge of a hard landing, or a solid inflection that “proves” the worst is over but takes “kitchen sink” stimulus off the table?
The worst is over… remember how credit cycles end without deleveraging and how stock market crashes recover in a month? Do I suspect the crew of the Titanic heard the impact of the iceberg and then said “whew, at least the worst if over now that the noise has stopped, we may have hit an iceberg but the ship is totally fine at least, good thing it’s unsinkable, back to work.” This time it’s different, the ship IS unsinkable… No… this time may be different but it isn’t that kind of different.