Mixed signals indicate China is still muddling through

In focus today

We continue to follow the developments in the Middle East after Iran's strike on Israel in the weekend. It will be key to watch for signals on the extent of an Israeli retaliation. So far, Israel has said it will "exact a price" from Iran, while the US, France, and the UK have all urged restraint. See more below.

We also look out for the German ZEW data for April. The assessment of the current business situation has stabilised in the recent months while expectations have risen, which suggests a bottoming out of activity Germany. It will be interesting to see if the April data further point to an improvement in activity. See more in Research Germany - Worst is over in German manufacturing, 15 April. Yesterday we also published Research Global - Manufacturing recovery to continue into the summer, 15 April, where we look at the lift to the global manufacturing cycle.

Economic and market news

What happened overnight

Chinese data releases overnight were a mixed bag. On the positive side GDP for Q1 surprised to the upside showing an increase in growth from 5.2% to 5.3% (consensus 4.8%). This puts the government on track for its 5% growth target and still leaves upside risk to our forecast of 4.5% for this year. However, growth is still much dependent on stimulus and public investments. Retail sales for March disappointed with growth of only 3.1% y/y in March versus consensus expectations of 4.8% y/y. Industrial production also surprised to the downside. After a strong start in Jan/Feb at 7% growth, March dropped to 4.5% y/y (consensus 6.0% y/y). On the slightly positive side, housing data showed a few rays of light with home sales improving as the three-month average increased to 108.2 million square meters (using our own seasonal adjustment) up from 70 million square meters in January. Overall housing is still weak, though and provides the main drag on the economy as it has a negative spill-over to private consumption. China is preparing new stimulus with a trade-in scheme for consumer goods coming soon, which may hold consumption in the short term before the scheme kicks in. Overall, developments continue to be in line with our muddling through scenario for Chinese growth.

What happened yesterday

Fears of an immediate further escalation of the Israel/Iran conflict diminished slightly yesterday, and oil prices posted a modest decline during the day but reversed losses overnight to stay flat. Markets were characterized by a degree of caution as they waited for signals from the conflict. Israel has made it clear that it intends to respond, but it has yet to decide on how and by how much and has stated that it will seek support from its allies. When and how are the key questions, including whether it will be by proxy or a direct confrontation, where the latter would be a very significant escalation. Several major powers (incl. the US and Germany) have sought to deescalate the situation by urging restraint. An escalation of the conflict could spark major unrest in the region and have global economic consequences, with an analysis from Bloomberg indicating that a direct war would raise the oil price by some USD 64 and lower GDP growth by 1 percentage point.

Opposite signed macro surprises from the US and euro area as figures for US retail sales showed a 0.7% m/m increase (cons: 0.3%) in March. The figure is somewhat clouded by technical factors (seasonal adjustment) but indicates the continuation of a steady growth trend. Conversely, euro area industrial production declined 6.4% y/y (cons: -5.7%) in February which together with a large decline in January means production will likely be a significant drag on growth in Q1 2024. US yields gained with the 10Y up 13bp as of last night, while the reaction to the euro area data was more muted.

The yen weakened against major currencies (again) during Monday's session with USD/JPY moving past the 154 mark (+0.6%) to hit its lowest level for the yen since 1990 as of last night. The strong US retail sales was one factor as this supports delayed Fed rate cuts. The Japanese finance minister reiterated warnings about a possible intervention, but he is in a tough spot as the recent development has largely been due to upside US surprises since the yen is sensitive to US rates, which puts the sustainability of the effects of an intervention into question.

Equities: Global equities were lower yesterday as US yields once again spoiled the party. The European and US equity cash sessions looked very different both in direction and rotations as the yield spike came relatively late in the European cash session. The global impact is of course biggest from the US development and hence the part to focus on. Sharply higher real yields and a steeper curve "finally" resulted in big tech and long duration stocks underperforming and thereby signalling that the recent lift to yields is more than equities can absorb short-term. The flipside was defensive value outperforming with banks joining after a very strong result from Goldman Sachs. VIX jumped to 19, reflecting the uncertainty arising from yields moving higher and financial conditions tightening. In US yesterday, Dow -0.7%, S&P 500 -1.2%, Nasdaq -1.8% and Russell 2000 -1.4%. Asian markets are sharply lower this morning led by Japan, South Korea and Taiwan reflecting the tech and cyclical sell-off. Chinese markets are doing better on mixed data out of China this morning. GDP came out very strong while industrial production and retails sales numbers disappointed. European and US futures are lower this morning as well.

FI: Global yields moved higher across the board as fear of escalation of the Middle Eastern conflict faded and thus markets have almost reversed the rally it recorded on Friday, despite the news over the weekend. 10y Bunds rose 6bp to 2.44% yesterday. US retail sales was stronger than anticipated. Currently, rates markets are caught in a directionless range currently as markets are waiting for a catalyst.

FX: The USD and the CHF, two safe havens, outperform the rest of G10 amid tensions in the Middle East. EUR/USD hits year-lows just shy of breaking below 1.06, while USD/JPY makes new year highs flirting with 154.50. Initially, EUR/SEK has weathered the storm, although the topside remains vulnerable to deteriorating risk sentiment. NOK/SEK down from parity to around 0.9950 as EUR/NOK edged higher. Brent oil is at USD 90.6/bbl this morning.