Stocks Will Not Find Recession Risk Relief in China Trade
Stocks Will Not Find Recession Risk Relief in China Trade
By:Ilya Spivak
Observers expect only modest growth in exports and imports from the world’s second-largest economy
China is expected to show narrow improvements in July’s trade and inflation data.
On-trend results will point to an anemic state for the world’s No. 2 economy.
Stock markets yearning for relief from global recession fears are unlikely to get it.
China is due to report July’s trade balance as well as producer and consumer price statistics (PPI and CPI, respectively). Modest improvements are expected on both fronts. Export and import growth is seen accelerating from the prior month while the headline inflation gauge ticks higher to 0.4% year-on-year from 0.2% in the prior month.
Readings broadly in line with expectations would remain within established trends over recent months. That’s hardly encouraging. China has struggled to revive economic activity after emerging from the COVID-19 pandemic. In fact, the second quarter marked a year of real gross domestic product (GDP) growth outpacing nominal expansion.
China trade and inflation data to underline an anemic status quo
That is a woeful state. When inflation-adjusted (i.e. “real”) growth tracks higher than the broader measure, this implies a negative reading on the price growth coefficient. This speaks to anemic demand. Put simply, the economy as a whole is being “discounted” because there is insufficient uptake to clear supply.
Citigroup data suggests Chinese economic figures have increasingly deteriorated relative to baseline forecasts over recent weeks. That may set the stage for downside surprises that make for a still sadder story than the status quo in the world’s second-largest economy.
Such outcomes would come at a most inconvenient time, just as the markets begin to worry in earnest about the onset of a recession. Ongoing weakness in China coupled with near-standstill in the Eurozone and increasingly acute signs of slowdown in the U.S. suggest all three major engines of global demand might be misfiring in tandem.
A weak economy in China adds to downward pressure on stock markets
The latest purchasing managers index (PMI) data from S&P Global showed worldwide economic activity growth slowed for a second consecutive month in July, sliding to the weakest setting since April. Meanwhile, Citigroup reports global economic data outcomes—not just those out of China—have increasingly disappointed for four months.
On balance, this seems to bode ill for risk appetite, hinting that the brutal bloodletting sweeping stock markets at the start of August reflects a gathering trend instead of a singular episode. Indeed, equities have traded lower—albeit at a calmer pace—since early July. A respite may yet come near-term, but the path of least resistance seems to lead downward.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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