Wall Street Highlights – Macro

The data: April imports, inflation and bank lending data all missed consensus expectations. Although the releases were even softer than GS below-consensus forecasts, GS still think the latest weakening is a soft patch rather than a turning point for China’s post-reopening recovery. With services activity still strong and property sector largely stabilized, GS believe the Chinese economy is still on a recovering path, even if it is not proceeding in a straight line.

The market: Market sentiment remains very weak in GS client conversations. However, discussions have quickly turned from “policymakers may tighten on better-than-expected data” last month to “policy should ease to stem deflation risks”. China medium-to-long term interest rates have retraced two-thirds of their reopening rally in late 2022 and early 2023. The RMB has weakened both against the Dollar and on a trade-weighted basis. This is striking compared to RMB’s historical correlations with other currencies and the fact that China’s current account surplus was still at 2.0% of GDP in Q1 despite a seasonal decline from Q4.

The policy: News on banks lowering deposit rates, combined with falling inflation, has triggered expectations of policy rate cuts. Lower deposit rates help 1) improve bank net interest margin and credit supply, 2) reduce interest rate arbitrage (e.g., firms borrowing at very low interest rates and depositing loan proceeds back in banks to earn carry), and 3) encourage consumption by reducing the incentive to save. But because the April Politburo meeting stated that recovery was better than expected and the April industrial production and retail sales data are likely to show very strong year-over-year growth, GS don’t think policy rate cuts are likely in the near term. Symbolic measures that aim at boosting confidence, such as RRR cuts, seem more likely, especially around quarter-end when liquidity demand is high.