China Stabilising after Strong March Quarter

Macro conditions looked mixed in May, but a ramp-up in June Quarter construction activity saw most indicators point to better demand conditions. The data looked blurred because of a strong Chinese March Quarter, stimulated by near record loan activity in the December Quarter of 2016. On the flipside, the US started to recover from a slow March Quarter, and the Euro economies breathed a sigh a relief from a conformist French election win.

Equity markets mirrored the macro backdrop, with the US Dow Jones testing record highs and the Chinese Shanghai Composite moving sideways in May after profit taking through April. Conditions in China have slowed, but stabilised, after a strong March Quarter. A tighter monetary stance and targeted investment restrictions in real estate saw April Industrial Production ease back to 6.5% year on year growth in April from stronger than expected 6.7% growth in March. Forward looking Purchasing Manufacturing Index (PMI) data rolled over in May at 51.2, slightly better than market expectations of 51.0. Underlying industry data looked more positive, with Chinese steel production rising to a record high of 72.8Mt in April and cement production bouncing 9.6% month on month to 221Mt. Interestingly, monetary conditions are now looking more stimulatory, with new loans rising in April for the first time in four months to RMB1,100m (Figure 1).

The US looks better after a slow March Quarter. April Industrial production rose to a 3-year high, up 2.2% year on year in April. Gains were broad-based across manufacturing, autos and mining, with capacity utilisation rates hitting a 20-month high of 76.7%. Manufacturing leading indicators - the New York Empire State and Philadelphia Fed Manufacturing Indices - paint a more mixed outlook. The diverging views (the Philly a lot more positive) most likely reflect the different stance on the Trump administration’s growth initiatives. And housing activity, which slowed in April due to cool weather, is expected to rebound in May–June with much warmer conditions emerging.

Investor confidence in financial market looks mildly positive. US equities again challenged record highs in May, with participants more confident of a bounce in June Quarter economic activity. The Chinese mood is warming. The Shanghai Composite eased 1.0% in May after a 2.5% drop in April (Figure 2). Encouragingly, investors shrugged off concerns of Moody’s credit downgrade for the economy. And talk the Chinese bourse could be included in the global MSCI indices could create support ahead of the US index provider’s June 20 decision.

Currency markets have been supportive for commodity markets. A mildly dovish monthly FOMC report in May, citing lower inflationary pressures, has investors paring back official rate hike expectations for the remainder of the year. That said, consensus still remains for at least one more rate rise in 2017, most likely at the 16–17 June meeting. And geopolitical tensions are abating, with North Korea off the front pages, but fresh Trump/Russia investigations could flare up, creating some volatility for risk orientated markets in the month ahead.