Daily Insight
Group Economics Macro & Financial Markets Research
15 July 2016
China GDP stabilise in 2016 Q2 Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
China Macro: GDP stabilise in 2016 Q2 - During 2015 and early 2016, China had often been the epicentre of global market turmoil, as disappointing macro data in combination with an unexpected currency devaluation and a sharp stock market correction fed doubts on Beijing’s ability to engineer a soft landing. However, these hard landing fears have eased, as the economy, stock markets and capital flows have stabilised. On Friday morning, Q2 GDP and June activity data were published. Annual growth stabilised in the second quarter, similar pace to 6.7% in 2016-Q1. On a quarterly basis, economic growth accelerated to 1.8% qoq (Q1: 1.2%). Meanwhile, industrial production and retail sales grew at a faster pace to 6.2% yoy and 10.6% yoy, respectively (May: 6.0% and 10.0%). However fixed investment growth fell by 0.6%-point compared to May, to 9.0% yoy. All in all, these data are in line with our base scenario of an ongoing gradual slowdown. We expect annual growth to slow from 6.9% in 2015 to 6.5% in 2016 and 6.0% in 2017. Still, China’s transition will remain bumpy, given the wide range of macro-financial and geopolitical risks prevailing. For more details we refer to our China Watch to be released later today. (Arjen van Dijkhuizen) Central banks: BoE on hold, but only until August - The BoE's decision to sit on its hands was a surprise to us and financial markets. We expected a 25bp reduction. Before the decision markets priced in a roughly 80% chance of a 25bp reduction. The MPC voted 8-1 to hold rates (dove GertJan Vlieghe wanted a 25bp cut) and 9-0 to keep the target for asset purchases unchanged. Nevertheless the statement was clear that stimulus was just a matter of time, noting that most MPC members expected ‘loosening in August’. The minutes recorded that members discussed various options or combination of options to step up monetary easing. It seems that most MPC members wanted to consider the new forecasts for growth and inflation as part of the August Inflation Report so that they can better decide on the appropriate degree and type of monetary stimulus. We think that aggressive monetary stimulus remains very likely next month. We expect (a) a 25bp reduction in Bank Rate (b) the launch of an GBP 150bn purchase programme taking total target to 525bn to be carried out between September 2016 and June 2017 – mostly gilts but also including credits with monthly purchases averaging 15bn (c) an easing of borrowing conditions for banks in its Funding for Lending Programme. (Nick Kounis) Global FX: Sterling jumps, though likely to resume fall - The BoE’s decision to keep monetary policy unchanged led to a surge in sterling. This carried on an existing trend, with sterling being supported by less political uncertainty, as the new Prime Minister and cabinet have fallen into place. Since last Thursday, sterling is up more than 3.5% versus the US dollar. We think that aggressive monetary easing, tough negotiations between the EU and UK and weaker UK data releases will weigh on sterling going forward. Therefore, the recovery in sterling will soon run out of steam in our view and we expect it to resume its fall. Meanwhile, the Japanese yen weakened, rising to above 105.50 overnight. This was triggered by news that former Fed Chairman Bernanke floated the idea of perpetual bonds with one of one of PM Abe's key advisers, triggering speculation of a helicopter money policy. This morning, the yen broke above 106 against the US dollar as risk sentiment improved after China's GDP came in slightly better than market expectations. The current momentum is in favour of further weakness in the yen. However we expect the yen to find
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Daily Insight - China GDP stabilise in 2016 Q2 - 15 July 2016
some support around 107-108 against the US dollar. On Thursday the fourth biggest Japanese life insurer said it expected the yen to trade between 98 to 108 in Q3. This implies that further weakness in the yen is likely to trigger more hedging of currency exposures. (Georgette Boele & Roy Teo) Eurozone Macro: Euroscepticism on the rise – One of the potential consequences of the Brexit-vote could be a change in sentiment towards the EU in other European countries. This would be particularly relevant in eurozone countries where general elections are on the agenda in the next few years. In the spring of 2017, elections are due in France (President and Assemblée Nationale) and the Netherlands, while it is Germany’s turn to go the polls in the autumn of 2017. In 2018, Italy and Austria should hold general elections. However, in Italy this might be sooner as Prime Minister Renzi may well step down in case of a ‘no’-vote in a constitutional referendum that will be held this autumn. In that case, there could be an early election in Italy. The rise in anti-EU or other types of anti-establishment parties makes it more difficult to form effective governments and also tends to influence policies of the more traditional parties. These risks seem highest in Austria, the Netherlands and Italy, where anti-EU parties currently are either leading the polls or are neck-and-neck with their main rival. In contrast, in Germany and France traditional parties still have a significant lead over Eurosceptic parties. Recent polls suggest that the Brexit-vote has not yet discouraged the supporters of Eurosceptic parties in other countries, implying that political risk in the eurozone remains elevated. Please see our Euro Watch note here for more. (Aline Schuiling)
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Daily Insight - China GDP stabilise in 2016 Q2 - 15 July 2016
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Daily Insight - China GDP stabilise in 2016 Q2 - 15 July 2016