All the usual questions lingered ahead of the June Fed meeting.
The balance of evidence suggests the world’s largest economy may have hit “peak” growth already and that everything from inflation to housing is set to cool from here. The question is whether it all cools enough to prevent the dreaded “overheat” and also whether growth remains steady enough to support the notion that the recovery is real and sustainable.
Meanwhile, in the world’s second largest economy, activity data for May (which is apparently released on a different schedule now) missed across the board. Although the NBS emphasized that slower retail sales are primarily attributable to the higher comp (from a year ago), market participants won’t be particularly enamored. Retail sales lagged industrial output for most of China’s recovery and May’s miss seemed to underscore relatively tepid domestic demand.
Retail sales rose 12.4% in May, worse than the 14% analysts expected and essentially matching the low-end of the range (+12% to +17%). Industrial output missed too, rising 8.8% against expectations for a 9.2% gain (figure below).
Fixed investment rose 15.4% from January through May. The market wanted 17%. The surveyed jobless rate ticked lower to 5%.
Market participants have taken to using a two-year average to help ameliorate the base effect from the pandemic. On that score, industrial production rose 6.6% in May and retail sales grew 4.5%.
That consumption isn’t particularly vigorous is a problem for policymakers, and it injects a sense of urgency into the effort to prevent soaring producer prices from manifesting in CPI. Tepid consumption is its own check on higher consumer prices, but that can become self-fulfilling in a bad way.
Gains for industrial production are tied, in part, to demand from abroad. “Subdued” may not be the best adjective for domestic demand, but neither is “robust.”
At the same time, the credit impulse turned negative last month amid official efforts to rein in speculation and rekindle a long-running de-leveraging push that proceeds (or doesn’t) in stop-and-go fashion depending on the macro environment.
“The deleveraging campaign is going in full force, targeting housing, implicit local government debt and weak SOEs. Land sales have cooled and SOEs are defaulting more than private companies,” SocGen’s Michelle Lam said, in a recent presentation. “The deceleration in credit growth has picked up and the credit impulse has turned negative, in line with our call for a notable weakening in growth momentum before year-end.”
Although the NBS’s Fu Linghui emphasized imbalances in the labor market, he put a reasonably positive spin on things. “Economic growth is gradually returning to the normal state of being driven by domestic consumption,” he said. I’m not sure I’d call that the “normal state.” China is marking a transition from a smokestack growth model to a more consumption-centric model consistent with developed economies, but it might be a stretch to suggest that’s already the “norm.”
Anyway, it’s worth noting that the ChiNext had an abysmal session, diving more than 4%.
“The downside miss for China industrial production and retail sales isn’t alarming given the base comparisons, but it will just add to the near-term headwinds for equities,” Bloomberg’s Mark Cranfield said. “The slump for the ChiNext encapsulates the rush for the exit mentality,” he added, noting that the drop in part represented “the read across from copper’s slide, which is hurting leveraged traders in commodities and equities.”
