The market’s gaze has temporarily shifted to the Gulf where a pair of oil tankers were set ablaze on Thursday, the latest incident to suggest that Iran is some semblance of serious when it comes to making life difficult for anyone traversing waters near the world’s key oil chokepoint.
So far, surging US stockpiles and a highly uncertain demand backdrop have helped keep a lid on crude prices despite mounting tensions. The murky outlook for demand is, of course, tied to the trade war and the read-through for the global economy of a further deterioration in relations between Washington and Beijing. Friday brought yet another reminder of how trade tensions are weighing on the economic outlook, as China’s industrial output growth slumped to the most sluggish pace since 2002.
IP printed just 5% YoY for May. That comes on the heels of April’s downside surprise and, as Barclays notes, “points to a marked drop from the averaged 7% in March-April and 6.5% in Q1.” Fixed-asset investment growth for the first five months of the year was the weakest since October 2018. Retail sales grew 8.6%, but that’s being written off to May Day effects.
All in all, China’s May activity data was not encouraging and neither, you’re reminded was April’s. “The May data, including contracting imports, declining export orders and falling core inflation, point to weak domestic demand amid a deteriorating external environment”, Barclays said Friday. The bank slashed its GDP outlook for China last week.
Goldman offers a straightforward take, arguing that the May data reflects a waning impulse from stimulus, which had been rolled back following a firming of the data in March and on the assumption that the trade war was drawing to a close.
“The slowdown has been mainly driven by the slowdown in domestic demand which weakened on the back of less policy support and possibly indirect impacts of the trade war via impacts on expectations”, the bank wrote Friday, adding that “the withdrawal of stimulus was triggered by the previous rebound in activity and inflation data, asset prices which include both equity and property, as well as criticisms of increasing leverage.” Goldman goes on to note that in April, the perception that the external environment was improving prompted tighter liquidity, slowing government bond issuance and a “less aggressive” approach to “administrative loosening measures.”
Those trends are starting to reverse, but it’s going to take a month or two to manifest itself in the data. “Since the re-escalation of the trade war in May, the government started to loosen but only modestly and the effects of these loosening measures were offset by the event of Baoshang takeover which led to widespread concerns about counterpart risks until these concerns eased very recently in June on the back of reassurances from the government”, the bank says.
Over the past couple of weeks, Beijing has rolled out measures aimed at boosting domestic activity including a directive focused on auto, home appliances and consumer electronics and a separate push to boost infrastructure spending. Here’s a quick recap:
(Barclays)
“Beijing will surely step up policy easing measures to arrest the worsening slowdown”, Bloomberg quotes Nomura’s Ting Lu as saying on Friday. He expects China to “allow the yuan to depreciate further if the US government decides to impose the 25% additional tariff on the remaining US$300 billion list.”
That brings everything back to the same, lingering questions about how aggressive Beijing is willing to get when it comes to combatting the slowdown with kitchen-sink-type stimulus and fighting the trade war with aggressively looser monetary policy and, failing that, active efforts to depreciate the currency.
Remember, China has “tremendous” room on fiscal and monetary policy – much to the chagrin of the man in the Oval Office.
