Pledges Bestowed

In China, the pace of growth slowed
Which highlighted how hard the road
Is going to be
For President Xi
To live up to pledges bestowed

With the Brexit situation now up to Boris Johnson’s domestic political machinations, finding the required 326 votes to pass his agreed deal with the EU, the market’s attention has turned elsewhere. It should be no surprise that China is the topic, this time based on the data released last night. While the trajectory of growth in China has been slowing quite consistently for the past ten years, last night’s 6.0% GDP result was weaker than expected and indicates that perhaps, that slowdown is accelerating. Alongside the GDP data, the other three key monthly data points; IP (5.6% YTD), Fixed Asset Investment (5.4% YTD), and Retail Sales (8.2% YTD) showed a mixed bag versus expectations, although generally all point to continuing slower growth. The trend in China is downward. On the one hand, this should not be surprising. After all, the larger the base size of an economy, the harder it is to grow rapidly. On the other hand, despite significant government control over the entire economy, it is becoming clear that the combined fiscal and monetary stimulus measures China is using are, so far, not up to the job of upholding President Xi’s targets.

Regarding the trade talks, this simply adds to pressure on Xi to find a deal. Despite his title as President for Life, there are clearly still many domestic political issues with which he must deal, and failure to bring about promised growth will be quite problematic. As many pundits have already described, the reality is that both sides need a deal given the fact that the eighteen month long trade spat has started to drag down both the US and China in terms of GDP growth. Interestingly, the PBOC fixed the renminbi stronger last night, although both the onshore and offshore yuan are trading weaker by about 0.1% this morning. Overall, though, the trend for the renminbi has been for modest weakening over time. Regardless of promises to manage the currency, the reality remains that China needs their currency to weaken as a relief valve for internal pressures. An interesting aside is that there is some evidence based on the errors and omissions portion of the Chinese accounts, that capital continues to flow out of China pretty aggressively, despite the capital controls imposed in the summer of 2015. Eventually, if that is true, USDCNY is going to go higher. I continue to look for an eventual move toward 7.40, but it may take longer than the end of this year as I previously thought.

However, beyond the Chinese data story, FX has been a pretty uneventful place to be overnight. G10 currencies are generally slightly firmer vs. the dollar, but we are only looking at the biggest mover, SEK, having rallied 0.3% this morning after a more substantive 1.3% rally yesterday. It seems that despite higher than expected unemployment data, there is concern that data may be faulty and the Riksbank may still have room to raise interest rates at their next meeting, or by the end of the year at the very least. But away from that story, there is nothing of real note in the G10 space.

And in truth, that is pretty much the situation in the EMG space as well. TRY is the leading gainer, higher by 0.85% after the cease-fire on the Syrian border went into effect. Elsewhere, both ZAR and KRW are firmer by 0.5% with the won benefitting from comments by Treasury Secretary Mnuchin that he may request an auto tariff exemption for South Korea. Meanwhile, the rand is the beneficiary of profit-taking after recent weakness in the currency, as traders and investors await the latest information on the Eskom situation in a government briefing later today.

For the rest of the day, while we wait to hear any tidbits from the UK, there is only one data point, Leading Indicators (exp 0.0%), and then we hear from three more Fed speakers, the uber-hawk, Esther George, as well as Richard Clarida and Robert Kaplan. So far this week we have heard the consistent message that the FOMC is watching the data closely but has not yet made up their mind if another cut is necessary right away.

In truth, it is shaping up to be an uneventful day to finish the week. The dollar is a bit soft, equity futures are little changed, as are equity markets throughout Europe, and Treasury yields are within 1bp of yesterday’s levels. Unless there is a tape bomb, it is hard to see a reason for a big more from current levels.

Good luck and good weekend