The Chinese economy grew at a much slower pace than expected in the April-June quarter
Markets
The US dollar is losing interest rate support at stealth pace. Since the awful June service ISM (July 3), the US 2-yr yield fell from 4.75% to 4.45% currently. The US 10-yr yield slid from 4.45% to 4.2%, testing the downside of the downward trend channel. Decent payrolls failed to save the day while softer CPI and PPI inflation (back-to-back, May/June) added to market belief that the Fed mistimed their updated policy rate guidance. At the June meeting, the median indication for this year shifted from a cumulative 75 bps rate cuts in March, to just 25 bps. US money markets now fully discount a 25 bps rate cut at the September and December meetings and even ponder the possibility of a faster pace towards year-end. Chicago Fed Goolsbee embraced the “pretty favorable” recent inflation data, but still wants to see more data like those to boost confidence that inflation is sustainably returning to the 2% inflation target. We keep a close eye on Fed speakers this week, starting with Fed Chair Powell tonight in an interview at the Economic Club of Washington DC (after European close). Any soft/dovish signals could extend the market repositioning and add to dollar weakness. EUR/USD rallied over the same time period (since ISM), from 1.0750 to 1.09. Apart from a soft USD, the euro got rid of the (French) political risk premium. The pair tests the topside of the 1.06-1.09 sideways trading range last Friday with the probability of break being high. The Trump shooting for now doesn’t really inspire much flows into USD (boost to his ballot odds). EUR/USD 1.10 (psycho) and 1.1139 (December 2023 top) are the next technical references. GBP/USD already moved passed that bar. Cable is inches away from a first 1.30 quote in just under a year after breaking the 1.2894 YTD top last week. EUR/GBP is in the same vein testing the 2-yr low at 0.84 in the run-up to the monthly UK data update. The US side of the equation helps Japanese intervention efforts to keep pressure off USD/JPY (158 currently). Apart from the Powell speech, today’s agenda contains the Empire Manufacturing Survey and some Q2 earnings. We earmark US retail sales and the ECB’s bank lending survey (tomorrow), UK inflation and a high-level Fed Waller speech (Wednesday), UK labour market data and the ECB meeting (Thursday) and UK retail sales (Friday) as this week’s other key events.
News and views
The Chinese economy grew at a much slower pace than expected in the April-June quarter. Q2 growth slowed to 0.7% Q/Q and 4.7% Y/Y from 1.6% Q/Q and 5.3% Y/Y in Q1. Cumulative YTD GDP growth slackened from 5.3% to 5%. Monthly data for the month of June indicated that the poor performance was mainly the result of poor domestic consumer demand. Retail sales growth in June slowed sharply from 3.7% Y/Y to 2%. Developments in the property sector continue to weigh both on activity and on sentiment. Property investment declined 10.1% YTD Y/Y in June. Residential property sales even declined 26.9% YTD Y/Y. House prices continue to decline. New Home prices in June fell 0.67% M/M and -4.88% Y/Y (from -4.3%). Price of existing homes were 0.85% lower M/M and 7.87% Y/Y. Industrial production held up better compared to the slowdown in domestic demand rising a better-than expected 5.3% Y/Y in June (6.0% YTD). According to the National Bureau of Statistics bad weather played a role in the disappointing Q2 growth performance, but the bureau also mentioned external and domestic difficulties to weigh on activity. The poor growth performance suggests that additional fiscal and monetary stimulus might be put in place as the Communist Party starts its Third Plenum meeting today. For now, the PBOC left the rate on its 1-yr medium term lending facility unchanged at 2.5%. The Chinese yuan declined modestly to USD/CNY 7.26.
According to a survey of the Rightmove property website, UK house prices declined by 0.4% M/M in July. Compared to the same month last year, price growth slowed from 0.6% Y/Y to 0.4% Y/Y. Despite the slowdown, Rightmove sounded cautiously optimistic on the price development going forward. "A first Base Rate cut for over four years, together with the new political certainty, could set the scene for a positive autumn market, with improved affordability and a more confident outlook in the second half of the year," Rightmove director of property science Tim Bannister, said.
Author
KBC Market Research Desk
KBC Bank
