China – Premier Li signals upcoming stimulus
Last week, Premier Li hosted a conference attended by over a 100 thousand government officials. Li painted a very bleak outlook for the Chinese economy, which has sparked market chatter of a potential stimulus. Local media is speculating a potential RMB 4tr ($600bn) stimulus package, which in absolute terms is like the post-Lehman package. Given the Chinese economy is now 3x its size since 2008, the stimulus would only be around 3.5% of GDP. However, this is still significant and a material reversal from the policy tightening over the past 18 months. While it is unclear how this stimulus would be funded, the same local media has discussed “large issuance via LGBs and special CGBs” and “monetizing fiscal”. Ultimately, if such a package were to pass, it would be positive for growth assets including oil, rates, and risk assets in general.
US – Mixed data signaling softness but no recession
After very weak numbers from Target and Walmart, Macy’s posted results which painted a better picture of the consumer. Macy’s results were relatively solid, buoyed by sales in sportswear and some luxury. Likewise, while US housing sales volumes continued to weaken from the highs of 2020 – they remained in line with historical averages and far above recessionary levels. In our view, while the US economy is certainly weaker than it was in 2021, data suggests that a recession isn’t imminent. Hence, we continue to expect the Fed to maintain their hawkish stance at least into year end.
European inflation – Market consensus expecting a moderation
European inflation data will be published this morning, with market consensus expecting a slight slowdown from April. However, early readings from Spain and NRW region of Germany indicated continued inflationary pressures with May inflation higher than April’s. The key question for markets is how fast the ECB will hike and where the policy rate will be by the end of the year. ECB President Lagarde signaled the possibility of rates being in “positive territory” by the end of Q3. They key debate amongst economists is whether a rate hike in the EU is justified as unlike the US, the EU’s inflation is predominantly supply-side led with still significant slack in the labour market. However, ultimately, we think the ECB should get at least above 0 given ultra-loose monetary policy is no longer justifiable and to give the ECB some ammunition to combat future crises.
Algebris Investments’ Global Credit Team
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