FX Daily: A less prolific Chinese consumer is a big problem for the West

11th June 2014

  • The World Bank downgraded their global growth outlook based on a sluggish first quarter in developed economies, though they maintained it won’t derail the economy. The situation in Ukraine and Russian as well as disappointing expansion in Latin America prompted a downgrade for the developing economies. (MNI Market News)
  • The BoE may have based its “forward guidance” for UK interest rates on flawed information, as the Bank’s main forecasting model Compass, does not include a projection for unemployment. (The Times)
  • The EU is stepping up its crusade against tax evasion, with Apple’s tax affairs in Ireland to come under investigation. The EU’s initial probe will focus on Ireland, but it could also move to other low tax centres in the EU, including the Netherlands and Luxembourg. (The FT)
  • Deutsche Bank, Goldman Sachs, HSBC, UBS and VTB Capital are the lead banks reported to be running a “roadshow” for Cyprus with investors in Europe for the euro bond sales rumoured to be in the pipelines. (The FT)
  • Recent yuan central parity suggests continuous yuan depreciation may have come to an end but there isn’t any foundation for sharp yuan appreciation either. (China Securities Journal)
  • China’s auto sales fell 4.6% m/m in May to 1.91 million units, compared with April’s 7.6% m/m decline, according to the China Association of Automobile Manufacturers. (China Securities Journal)
  • The internationalisation of the renminbi has continued to gain momentum, with Azerbaijan’s sovereign wealth fund planning to invest in the Chinese currency. (The FT)
  • Japan Corporate Goods Price Index rose 4.4% annually in May, beating expectation of 4.1%. The previous reading was upgraded by 0.1% to 4.2%.
  • Australia June Westpac Consumer Confidence rose just 0.2% in June, following a -6.8% fall in May following the Treasury’s austerity budget.

Yesterday euro-sterling fell to an 18 month low of $0.80639. The move lower came after the UK economy reported a 0.4% rise in both industrial and manufacturing production, however the depreciation was more to do with a sell-off in the euro as the euro funding currency story gained further traction. The annual rate of increase in industrial production was the fastest since January 2011. While this bodes well for an ongoing UK recovery and puts the UK on course to surpass its pre-crisis output peak in the second quarter.

Today the ONS reports the national unemployment data. Despite the Bank of England’s theory that a pick-up in productivity would slow job growth, employment is expanding in step with the quickening pace of the UK recovery. March saw a record increase in job creation and the number of people claiming jobless benefits continues to fall. The UK is also not suffering the same participation problem as the US, with a consistent increase in people joining the labour market. However there is some hidden spare capacity in the UK labour market, which explains the increase in the number of self-employed. Of the 722,000 jobs created over the last year, over half were self-employed positions. Record employment gains may hide the sad reality that workers are being forced to set up their own businesses when they can’t find jobs. There is also a high level of part-time workers, accounting for 21% of all job gains in the last year. the best overall indicator that the declining unemployment rate isn’t all it seems is weak wage growth. Annual wage growth may be increasing but it is doing so from a low level and barely breaking even over inflation. This is still an employers’ market. Further falls in the unemployment rate and a high level of job creation are expected in this report, but poor wage growth highlights the underlying weakness of the labour market. The jobs markets certainly won’t be on Carney’s list of pros for raising the interest rate.

China’s targeted stimulus may appear to be paying off with signs of rebounding confidence in the manufacturing and services sector but the Chinese consumer remains anxious. The China Association of Automobile Manufacturers reported that car sales declined 4.6% on the month in May, following a 7.6% decline in April. There are further reports that the property sector continues to decline, removing an important growth engine for the Chinese economy. Retailers such as Prada are reporting falling earning as the Chinese consumer market reins in spending. Chinese authorities have been implemented a batch of “mini-stimulus” measures since early April, even urging local government bodies to speed up their spending plans. However they cannot delude the Chinese from the obvious pain on the grounds as ineffective investment lending defaults and the bubbling housing sector threatens to pop. China’s May CPI print may have beat expectations but the negative producer price growth exemplifies falling domestic demand. China biggest trade surplus in five years was based on a 1.6% slump in imports. We are confident Chinese authority will implement as many stimulus measures as necessary to achieve their 7.5% growth target. A less prolific Chinese consumer is a greater concern for Western economies, particularly Europe and the US. After both recording disappointing first quarter growth, a weaker Chinese consumer doesn’t bode well for a strong bounce back in the remainder of the year.