China reported activity data for April on Friday, and the numbers were mixed versus expectations.
Retail sales fell 7.5% YoY, versus the 6% decline economists were looking for. Industrial output, on the other hand, rose 3.9%, well ahead of the 1.5% the market was expecting.
April marks the first on year gain for industrial output since the epidemic began.
Fixed asset investment (for January through April) is down 10.3%. That’s marginally worse than expected, but basically in line.
The surveyed jobless rate was 6%, a shade higher than March’s 5.9%. (Needless to say, that is not the real jobless rate in China.)
In March, the data was mixed and betrayed a rather stark divergence between industrial output (which rebounded in true “V-shaped” fashion from February’s historic plunge) and retail sales (which remained subdued).
For some, the disparity appeared to validate concerns about the difficulty of reinvigorating consumer activity in the wake of the epidemic. While you can flip the proverbial switch on industry (especially in a command economy), you can’t force people to go out to eat, or compel them to get coffee away from home, or demand they go shopping.
The future of consumer behavior therefore hinges on the evolution of the virus. And in that regard, new flare-ups in China and South Korea are a cautionary tale.
The data for April may serve to perpetuate those worries, although April’s drop in retail sales was just half of March’s decline.
On Thursday, China confused some market participants by not rolling 200 billion yuan in maturing MLF on schedule. Most observers were looking for at least some of that funding to be rolled, and also for the rate to be cut by as much as 20bps, setting up another cut to the loan prime rate (the de facto benchmark) later this month.
On Friday, China offered 100 billion yuan in one-year MLF, but kept the rate unchanged. It’s not clear how they plan to guide the loan prime rate substantially lower later this month without cutting MLF first. It’s technically possible, but it would be a break with precedent.
CPI and PPI data for April (out earlier this week) clearly made the case for more easing. The rise in consumer prices abated as food inflation eased, while factory-gate deflation worsened materially, underscoring demand concerns, as the effects of the pandemic linger domestically and continue to weigh heavily abroad.
Core inflation was just 1.1% on year in April.
As ever, PPI deflation is a particularly vexing problem for China, as it eats into industrial companies’ profits which have plunged in the wake of COVID-19.
The bottom line is that deflationary pressures and the demand shock from the virus easily outweigh still elevated consumer prices when it comes to the monetary policy calculus, which means you can expect more easing, especially given the type of kitchen-sink rate cuts and asset purchases implemented in developing economies.
All of this comes ahead of the National People’s Congress, and as tensions between Washington and Beijing flare anew. During an interview with Fox on Thursday, Donald Trump said he doesn’t want to speak to Xi at the moment, and lawmakers in the US are pressing for sanctions against Chinese officials in connection with human rights abuses in Xinjiang. A separate piece of legislation championed by Lindsey Graham calls for additional sanctions in the event Beijing doesn’t provide a satisfactory account of COVID-19’s origins.
The yuan, meanwhile, has been kept in check by stronger fixes, bill sales in Hong Kong and intervention from state banks. It’s an eerie calm, to be sure.