Aggregate financing in China in July totaled 1.22T yuan, 220b more than expected but down from 1.77T yuan in June. Of this, 825b were official bank loans (down from 1.54T m/o/m) with the balance coming from the non bank side that Chinese officials are trying so hard to corral. Part of this was a rebound in corporate bond issuance. They are having some success which is being reflected in the money supply data where M2 growth was 9.2% y/o/y, down from 9.4% in June, below the estimate of 9.5% and which is the slowest rate of gain on record dating back to 1996 where data first started. That said, for all the talk of trying to slow excessive credit growth and ‘delever’ the financial system, overall loan growth is still up 20% y/o/y year to date. Thus, we are seeing the constant juggling act of Chinese authorities who want the dream of 6.5-7% economic growth but not the nightmare of the consequences of a massive credit bubble on their hands. The Chinese like orderly moves and stability and are trying to bring the shadow side of banking into the light (and back on bank balance sheets). This balance and keeping it together between growth and leverage is also a big focus right now ahead of the autumn get together of the 19th National Congress of the Communist Party of China. This data came out after the Chinese markets closed where the Shanghai comp was up by .4% while the H share index was higher by 1/3. The yuan is down slightly.
German GDP growth in Q2 was up .6% q/o/q and 2.1% y/o/y, about in line if we include the Q1 revision. While the German economy is the stalwart of Europe, their average 1.9% growth rate over the past 4 quarters is no different than in the US. Consumer spending, capital spending, construction and government spending added to growth while trade was a drag because imports grew faster than exports which is not something Germany is used to. The euro is down after the data but as stated, it was in line when the Q1 revision is included. With less than 2 weeks before Mario Draghi speaks, the German 10 yr yield is up more than 3 bps to .44%, a one week high as geopolitics calms a bit.
Bill Dudley yesterday implicitly admitted the market driven feedback loop that they are on where calm financial markets now beget more monetary tightening which at some point will lead to market instability that will end the tightening. We saw this in the beginning of 2016. How in the world does Mario Draghi think he’s going to be able to remove accommodation without creating a major hissy fit in European bond markets considering where yields there lie. I saw a chart last week that an aggregation of the yield of European junk bonds is about the same as the US Treasury 10 yr yield. Throwing an epic party is so easy to do but cleaning up is always messy.
Putting aside, the ECB’s desire for near 2% inflation and that influence on the pace of QE, logistics (sticking to capital key constraints) and German politics are still key factors that could result in further tapering. Today the German Constitutional Court is asking the European Court of Justice to rule on the legality of the current QE program. This court said “Significant reasons indicate that the ECB decisions governing the asset purchases program violate the prohibition of monetary financing and exceed the monetary policy mandate of the ECB, thus encroaching upon the competences of the Member States.” Of course the ECB was quick to respond in its own defense by saying its “fully within our mandate.” The European court will now decide but by the time they do, this program could be close to over anyway. That said, it could facilitate that process if politics with Germany become a bigger issue.
UK citizens are still choking on elevated inflation but Mark Carney is breathing a sigh of relief that at least the pace is not further accelerating. Headline CPI was up by 2.6% y/o/y in July, the same rate as in June but one tenth less than expected. The core rate held at 2.4% which was also one tenth below the forecast. The fear of Brexit and its economic impact is why the BoE can substantiate in their own minds the current .25% benchmark rate but it goes in the face of their sole mandate of price stability at the same time wage growth is modest. The import price pressures from the weak pound continues to moderate on base effects as it rose 6.5% y/o/y, the slowest pace of gain since July 2016, right after the vote. Margins are still getting squeezed as output prices were up by 3.2% y/o/y. With the global selloff in bonds, the 2 yr Gilt yield is up by 2 bps and the 10 yr is up by 3 bps. The pound is weaker to the lowest level in 3 weeks vs the US dollar. I expect the BoE to hike before year end but that would just take away the emergency cut last year where all the BoE growth estimates never came close to being realized. The UK consumer and saver has suffered instead. It will certainly not beckon a multi hike cycle because of those Brexit fears.