Letter from China
- 15 April 2024 (10 min read)
By explicitly introducing a reference to easing in their prepared statement, the ECB has cemented the market’s – and ours – expectation of a rate cut in June. What we found particularly interesting in the press conference was a sense that the central bank would be ready to tolerate some pressure on energy prices – accepting “fluctuations” around their disinflation baseline – which is welcome given the recent escalation in the Middle East.
The disinflation narrative is clear in the Euro area, it is not in the US, and we had another disappointing print for the US CPI last week. Although producer prices brought some reassurance, we feel time is getting tight to get enough confidence for the Fed to cut by June and we have brought our expectation for the first easing to July.
The real estate slump continues in China, which is consistent with the past experience of other countries: these issues don’t disappear fast. We draw on these episodes to look into China’s overall macroeconomic strategy. The US reaction to the subprime crisis was to engage in policy “carpet bombing”, with massive fiscal and monetary support. In contrast, some of the Euro area peripherals such as Spain which had to deal with a collapse in residential investment did not have the same policy space and had to resort to “internal devaluation” : they owe the success of their adjustment to strong improvement on the export side. China’s current fiscal position makes it difficult to expect there the same quantum of government support the US enjoyed after 2008. It is going to be very tempting to rely on exports to make up for the output lost to the real estate crisis. The sheer size of China in world trade makes it however difficult to expect an export-led strategy could be accepted without significant tension with trade partners. When looking for a solution to China’s current predicament, we think that a key issue is how the proceeds of stronger productivity growth could be channelled towards higher real wages, rather than lowering further the price of Chinese exports, with looser monetary policy “greasing the wheels” of the adjustment.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.