China’s super-nuanced Loan Prime Rate cut aims to prop up the property sector. EMEA’s incoming Q1 activity indicators are not as weak as feared.
China Growth, Policy Response
Question #1 – Is China’s “drip” stimulus working? China started Q2 on a soft note – pretty much all domestic activity indicators were much weaker than expected in April. This was followed by another wave of the near-term growth downgrades, and more questions about the adequacy of the policy response. Today’s super-nuanced Loan Prime Rate (LPR) decision gave us further insights into policy priorities. Contrary to expectations, the 1-year rate was kept on hold, but the 5-year rate was cut more than expected by 15bps. The 5-year LPR rate is used as an anchor for mortgage rates – so today’s move should be considered in conjunction with the weekend’s 20bps cut in the mortgage floor for first-time home buyers, which brings the effective rate cut to more sizable 35bps. So, it looks like the immediate policy focus will be on the property sector - as well as infrastructure investments.
Europe Growth, War Impact
Question #2 – How bad is the Russia/Ukraine war’s impact on the European growth? Europe was often called “the weak link of global growth” – both at this year’s IMF meetings in Washington DC and during our recent research trip to Central Europe. The consensus view was that very strong Q1 expansion will be followed by a major reversal in Q2. Well, today’s domestic activity indicators in Poland were indeed weaker, but not terribly so. The industrial output growth stayed in double-digits (13% year-on-year), and the employment growth actually accelerated in April. So, the growth “Armageddon” scare might not materialize – this is a good thing - but it also means that the central bank might need to step up policy tightening, as strong domestic demand will continue to feed into already very high inflation.
LATAM Politics, Policy Agenda
Question #3 – Where is LATAM politics heading? LATAM’s local debt rocked in Q1, and with several elections approaching fast, the market is understandably concerned that political hiccups can spoil the party. And indeed there are some interesting twists. In Brazil, ex-President Lula’s 12% lead in the polls is not too surprising, but it is nevertheless awe-inspiring. Lula is a leftist and populist, but he is working hard on his business-friendly image, including getting a centrist running mate. In Colombia, a surprising last-minute rise in the polls of a right-wing candidate might re-shape what was supposed to be a “two-horse” race. Finally in Argentina, a meteoric ascent of an anti-establishment presidential candidate, Javier Milei, is drawing a lot of attention – in part because of having the Austrian School, von Mises, and Volcker as his influences (=a libertarian?), and also because of his 1970s-style sideburns! Have a great weekend and stay tuned!