China stimulus – Baby steps are better than nothing.
Last week, China’s PBOC cut the 5-year Loan Prime Rate from 4.6% to 4.45%. The cut is not large, but the 5y LPR is the reference for mortgage rates within the country, and thus represented a step towards credit easing. Moreover, authorities chose to cut 5bp more than expected by consensus. The policy move triggered some reversal in the currency, suggesting it transmitted some dose of confidence to markets. Over the past nine months, the Chinese economy has been hit by a series of shocks, from stress in the property market to a major lockdown in recent months. The policy reaction has been relatively small, and mostly concentrated on fiscal transfers. Monetary policy changes have so far focused on RRR cuts, which provide relief to the banking sector more than to final credit demand. A cut to loan rates a step of progress in this context and provides direct credit stimulus to the most troubled area of the market. Still, stimulus measures remain very fragmented and a change to the zero covid policy remains unlikely until the Party Congress in fall, suggesting a further deceleration growth. We see sub 4.5% growth for 2022 as the base case at this stage.
US consumer – Inflation causing some cracks.
The economic worries that surrounded Europe and China over the past months are now reaching the US too. Last week, major US consumer businesses like Target, Walmart and Kohl have reported results which indicate that the consumer is getting hurt by inflation. The numbers display a strong miss in revenues, and a move away from high margin items, suggesting some difficulty to pass through higher costs onto consumers. Similarly, leading business indicators in a number of US states started deteriorating meaningfully. The US economy has experienced the largest average growth downgrade of the past month, with consensus forecasts moving from 3% to 2.7% for 2022 over the past week. High inflation is finally eating into real incomes, but wage growth has somewhat picked up too. An inflation deceleration towards levels closer to 5% should thus attenuate consumer impact. Net consumer wealth remains pretty high vs past slowdown too. Overall, we recognize fast inflation is causing a slowdown, but we see the impact on consumer balance sheets as moderate over the next twelve months, and we see the US as remaining far from recessionary levels. The Fed is likely to continue to look through the recent data deterioration and maintain its focus firmly on inflation.
Algebris Investments’ Global Credit Team
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