Fitful Starts

Equities are consolidating, a process which could last between one and three months, and will ultimately be “a great entry point” for the next move higher.

That’s according to JPMorgan’s Mislav Matejka. He suggested being wary of tech, though. In the near-term, more traditional defensives are preferable.

If you were looking to start the week on a constructive note, feel free to grasp at that straw.

Meanwhile, China’s recovery looks to be cooling. Activity data for April showed retail sales trailing estimates by a considerable margin. Consumption lagged the factory rebound during the early stages of the country’s recovery, and although most indicators suggest the world’s second-largest economy is on sound footing (notwithstanding concerns over rising defaults and property bubbles), a relatively weak read on domestic demand wasn’t the best news Monday.

Retail sales rose 17.7% in April against consensus for a 25% expansion (shown by the difference between the black line and red dot in the figure, below). Industrial output was largely inline, rising 9.8% YoY.

The figures are obviously bedeviled by the comp with last year. On a two-year average basis, retail sales growth was 4.3% in April compared to 6.3% in March.

As ever, China’s transition to a more consumption-oriented growth model isn’t seamless and the pandemic arguably complicated the situation. Global demand for the country’s exports was robust during the crisis and continues to be so. At the same time, officials are keen to restart the de-leveraging push.

“For now, the recovery remains too uneven and fragile for the PBoC to invoke the blunt tool of rate hikes,” SocGen’s Wei Yao and Michelle Lam said. “The lack of a re-acceleration of consumption is particularly worrying in light of an almost inevitable moderation in export growth in H2,” they added, cautioning that “if domestic demand doesn’t strengthen more notably in the coming months, the increasingly likely scenario is that the PBoC will get no window to hike at all.”

Early last month, Beijing instructed banks to maintain lending at around the same level versus 2020. If banks adhere to the PBoC’s guidance, the pace of credit growth would slow to a 15-year nadir. China’s credit impulse turned negative in April.

All of that while Beijing attempts to help manage possible global fallout from surging producer prices in the country.

Staying in Asia, Taiwan is grappling with its worst COVID outbreak, a development which threatens to undermine its reputation as one of the world’s only real “success” stories from the pandemic. The economic issue is obvious. “Authorities are hesitant to put in place stronger restrictions out of concern they will sacrifice the economy’s strongest growth in years, especially at a time when governments and companies around the world are clamoring for access to supplies of Taiwan’s semiconductors,” Bloomberg wrote. Local equities fell more than 8% last week and extended losses on Monday (figure below).

Circling back stateside, the rhetoric was predictable as the new week dawned — it’s all about inflation.

“It’s clear from a plethora of data spanning consumer and producer surveys, CPI and PPI, forecasts by professional economists, commodity and other input prices, as well as rising breakevens, that inflation is currently a real phenomenon,” BNY Mellon’s John Velis offered.

And yet, policymakers are keen to avoid a scenario where one (or two or three) months of data lead them into a trap.

“The debate is whether the strong recovery and pick-up in inflation were just a spurt driven by policy support and reopening,” Morgan Stanley’s Chetan Ahya remarked. “If so, global growth could slow as it did in 2012 when policymakers withdrew fiscal and monetary policy support,” he added. “The resulting weak growth and lowflation environment raised fears of secular stagnation.”