China’s economy in Q1 dipped to its slowest level of growth in 18 months it was shown overnight as the valuable construction sector slowed amid calls and plans for ongoing credit tightening. The economy grew on a year-on-year basis by 7.4%, slightly higher than the consensus estimate of 7.3% – a figure that would have been the lowest growth level since 2010. The 7.4% figure is not a disaster in itself but is a perpetuation of a recent trend that could already be bottoming out. Retail sales and industrial production figures for March were decent enough, growing by 12.0% and 8.8% respectively on a year-on-year scale and will likely lead to a decision from powers within China to focus its stimulative efforts on the construction sector.
The slight beat of estimates was the worst news for those of us who were looking for a figure that would give currencies a test of their recent trends. AUD climbed slightly after the announcement with the JPY breaking to the low side as investors betting on further growth jumped into equities. Elsewhere the move has been very muted.
NZD fell back overnight as well as inflation pressures were shown to have moderated slightly in Q1. CPI slipped to 1.5% compared to Q1 last year, slightly lower than Q4′s 1.6%, damaging expectations of further rate rises from the RBNZ in the process. OIS swaps market before the announcement had a 22% probability that we would see a 50bps rise at the RBNZ’s next meeting – due a week tomorrow – but has now slipped to 10%. The majority remains at a 25bps rise. The price of dairy products, products that make up one third of NZ exports, fell by 2.6% on the week as well, hurting the NZD.
The main focus here in the UK will be the latest bout of wage data. Yesterday’s inflation data from the UK confirmed what everyone had thought. Developed market economies – US, UK, the Eurozone, Switzerland, Sweden – are all experiencing periods of sub-trend inflation at the moment, lessening the pressure on consumers as it falls, given recent encouraging wage dynamics. Most of the drop in recent months, this is the 3rd month of below target price increases, has been down to the recent slips in oil prices taking transport and logistical prices lower.
Rate expectations have got ahead of themselves in recent months in the UK and a lower inflation picture will complement the banks wariness of raising rates to early. This in keeping with a central bank policy that has shifted from a more quantitative form of forward guidance to a more qualitative, holistic view. When jobs rate thresholds were all the rage – 7% in the UK, 6.5% in the US – inflation barely got a look in. Now with jobs growth continuing to improve it will be prices, not payrolls, that governs the interest rate lever.
With these slower price increases, we have the opportunity to see wages outstrip inflation for the first time since 2010 – a welcome relief for all concerned. We are also looking for the overall ILO unemployment rate to dip to 7.0%, a figure that used to hold all kinds of connotations for interest rates but is now a discarded forward guidance threshold.
US inflation surprised to the upside yesterday with a decent increase in core prices as well as the headline index. Yellen’s speech yesterday had no economic or monetary policy focus and was not a market event. She speaks again today at 17.25 BST. The dollar has progressed overnight against the JPY and NZD but remains largely lower elsewhere.
Finally our attention must turn to Ukraine. Headlines of “counter-terror” operations and airborne divisions clashing in the east of the country were unable to get markets too scared. Ukraine seems to be on the front-foot and attempting to drag Russia into a larger fight, a fight that would bring Western powers closer to joining in as well. This civil war may not be civil for much longer.
