(1) the central banks of the United States and Europe stated that they were both “partial hawks”, and the global tightening cycle was further strengthened
On May 17 local time, Federal Reserve Chairman Powell said that FOMC widely supported raising interest rates by 50 basis points at the next two meetings. He said that the Federal Reserve would not hesitate to see the inflation rate rise in the right position until the Federal Reserve was in a position to reduce it. Last week, European Central Bank President Lagarde said at a meeting in Slovenia that the European Central Bank would end bond purchase at the beginning of the third quarter of this year and decide to raise interest rates in the following weeks. On Tuesday, Klaas knot, the governor of the Dutch Central Bank and the managing committee of the European Central Bank, said on a TV program that he suggested that the European central bank raise interest rates by 25bp in July. If inflation is more serious, it can raise interest rates by 50bp. On Wednesday, Ignazio visco, governor of the Italian central bank and member of the European Central Bank Management Committee, said that it was “definitely” impossible to raise interest rates in June and “maybe” is the time to start raising interest rates in July. The US and European central banks continued to release hawkish signals, which continued to raise market expectations of global liquidity tightening. From the perspective of market expectations, the data released by CME showed that the probability of the Fed raising interest rates by 50 BPs in June and July this week rose to 94.9% and 94.7% respectively, indicating that the Fed will raise interest rates by 100 bps in the next two months. In the second half of this year, for China, the space for loose monetary policy will be further narrowed.
(2) the liquidity of China’s money market is still abundant, and the reduction of LPR is good for the capital market
This week, the open market operation of the central bank continued to be stable, with a daily investment of 10 billion yuan of 7D reverse repo, and the interest rate remained at 2.1%. In addition, on May 17, the central bank continued the same amount of 100 billion MLF due, with an interest rate of 2.85%. Superimposed on the expiration of the previous reverse repo, the cumulative net investment of the open market operation of the central bank this week was – 10 billion yuan. In terms of money market interest rate, as of May 20, dr007 and shibor1w were 1.58% and 1.67% respectively, up 3 BP and down 0.6 BP respectively compared with May 13. The money market interest rate is still significantly lower than 2.1% of the reverse repurchase bidding interest rate, indicating that the market liquidity is relatively abundant. From May 13 to May 20, the RMB depreciated against the euro and rose slightly against the US dollar. This week, the yield of China’s ten-year Treasury bond rose and that of the United States fell. Between the rise and fall, the interest rate difference between China and the United States ended the continuous upside down since April 29 on May 20, which temporarily eased the pressure on the RMB exchange rate and China’s monetary policy.
On May 20, the 1-year LPR reported 3.7% remained unchanged, and the 5-year LPR reported 4.45%, down 15bp. The five-year LPR reduction is mainly aimed at the weak medium and long-term loans of enterprises and residents in the recent credit structure, which is intended to boost the medium and long-term financing demand and remove the main obstacles to promoting wide credit. At present, the epidemic situation in China is gradually easing, and the production and operation activities of enterprises will gradually resume. Combined with the reduction of five-year LPR to reduce financing costs, it is expected that the medium and long-term credit demand of enterprise departments will pick up. Residents’ medium and long-term financing mainly corresponds to real estate credit. The reduction of the lower limit of interest rate of five-year LPR and the first commercial housing loan will jointly promote the reduction of housing loan interest rate and help boost real estate sales. For the capital market, reducing LPR will help to enhance the market’s expectation of wide credit, which is good for the stock market and bad for the bond market.
(3) the epidemic had a serious impact on the economy in April
3.1. Consumption shrinkage exceeded market expectations: in April 2022, the total retail sales of social consumer goods were – 11.1% year-on-year (market expectation – 5.9%), which continued to be negative year-on-year after last month (last month was negative for the first time since August 2020), and the shrinkage was deepened, with a year-on-year growth rate of – 7.57 PCTs compared with last month. On the whole, the situation of epidemic prevention and control in April was more severe than that in March, and the drag on social zero was more obvious than that in March. Since May, the epidemic has eased, and Shanghai, which is the most serious epidemic, has formulated a detailed plan for returning to work and production. Compared with April, there is a marginal improvement in the probability of social zero in May, but it is expected to be difficult to return to the level in the first two months of this year, and it will take time for consumption to recover significantly.
3.2. The real estate investment has an obvious drag effect: in April 2022, the fixed investment was + 1.8% year-on-year, compared with -4.8pcts in March, of which the manufacturing investment was + 6.39% (compared with -5.55pcts in March), the infrastructure investment was + 4.35% (compared with -7.45pcts in March), and the real estate development investment was – 10.07% (compared with -7.68pcts in March). In April, real estate investment led to the decline of 2.67pcts in fixed investment, while manufacturing investment and infrastructure investment led to the rise of 2.42pcts and 1.45pcts respectively. The accelerated decline of real estate investment superimposed with the slowdown of the growth rate of manufacturing investment and infrastructure investment to varying degrees, which led to the slowdown of the growth rate of fixed investment compared with March.
The growth rate of manufacturing investment in March and April was lower than that in March, mainly due to the impact of the epidemic and the high price of raw materials: in April 2022, manufacturing investment was + 6.39%, compared with -5.55pcts in March. The decline in the growth rate of manufacturing investment in April was mainly due to the weakening of the expected margin of manufacturing industry and the suppression of investment demand under the impact of the epidemic and the high price of raw materials. Looking back, the epidemic has eased since May. From the high-frequency data, the throughput index of the public logistics park, the throughput index of the distribution center of major express enterprises and the vehicle freight flow index have continued to improve since the middle and late April. The interference of logistics congestion on the production and demand of the manufacturing industry has continued to weaken. The manufacturing industry is expected to strengthen marginally. With the continuous promotion of various credit policies, it is expected that the investment in the manufacturing industry will still maintain strong toughness.
3.4. The downward range of real estate investment increased in April, which continued to drag down the growth rate of fixed investment: in April 2022, real estate investment was – 10.07% year-on-year, compared with -7.68pcts in March. In April, the real estate investment data continued to bottom. Except that the decline rate of house completion decreased slightly, both the construction of real estate enterprises, the purchase of houses by residents and the purchase of land by real estate enterprises continued to decline. In the first two weeks of May, the transaction area of commercial housing in 30 large and medium-sized cities and the transaction area of land in 100 large and medium-sized cities were still declining year-on-year, both of which exceeded the level in April. Residents’ purchase of houses and real estate developers’ purchase of land were still not active. In addition, the transaction land premium rate in 100 large and medium-sized cities was also higher than that in last year, and real estate investment may still be difficult to stabilize in May. On May 15, the people’s Bank of China and the China Banking and Insurance Regulatory Commission issued a notice on issues related to the adjustment of differentiated housing credit policies. The lower limit of the interest rate of commercial individual housing loans for the first set of housing was adjusted to not less than the quoted interest rate in the loan market of the corresponding term by 20 basis points. On May 20, the five-year LPR was reduced by 15bp, and the residents’ house purchase cost further decreased. The specific effect on real estate sales still needs to be observed. If real estate investment continues to accelerate downward, the possibility of greater deregulation measures in the later stage cannot be ruled out.
3.5. The growth rate of infrastructure investment decreased in April, and there was no worry in the follow-up: in April 2022, the growth rate of infrastructure investment decreased. On the one hand, there was a certain “race” in the first three months, squeezing the infrastructure share in April. At the same time, it was also affected by the fermentation of the epidemic and the limited commencement (the business activity index of the construction industry in April was 52.7%, compared with – 5.4pcts in March). Looking back, the growth rate of infrastructure investment is carefree. The Ministry of finance requires that the issuance of most of the new special bonds this year be completed by the end of June. Assuming that the corresponding issuance completion rate is between 70% and 90%, the total issuance of special bonds in May and June is about 1.21 trillion yuan to 1.94 yuan, with an average of 0.60 trillion yuan to 0.97 trillion yuan per month.
With sufficient funds and strong demand for steady growth, it is expected that the follow-up infrastructure investment will remain high.
3.6 under the impact of the epidemic, the industrial added value increased negatively year-on-year in April: in April 2022, the industrial added value increased by – 2.9% year-on-year, the first negative since April 2020. Under the impact of the epidemic, the negative year-on-year growth of manufacturing added value was the main reason for the negative year-on-year growth of industrial added value in April. In April, with the substantial closure of Shanghai and the intensification of the epidemic in many cities across the country, the national logistics network was greatly affected. The PMI supplier distribution time index recorded 37.2%, the second lowest in history after the outbreak of the epidemic in February 2020 (PMI supplier distribution time index 32.1% in February 2020). The Bureau of Statistics said that many enterprises reported increasing difficulties in logistics and transportation, and even difficulties in the supply of main raw materials and key parts, poor sales of finished products, and the production and operation of upstream and downstream related enterprises were greatly affected. The manufacturing industry is located in the downstream of the industrial chain and is more affected. The year-on-year decline of manufacturing added value finally led to the negative year-on-year industrial added value in April. Looking back, the epidemic situation has eased since May, and the high-frequency logistics index has continued to improve since mid and late April. With the mitigation of the disturbance of the epidemic to industrial production, it is expected that the industrial added value in May is expected to turn positive year-on-year.
(4) follow up judgment: the economic data in April may be the low point of the whole year, and the urgency of stabilizing the demand for fiscal policy is highlighted
The decline of economic data in April has been expected by the market. The weakness of industrial production, consumption, real estate sales and investment data is mutually confirmed with the previously released credit data. Under the increasing downward pressure on the economy, the steady growth policy needs to be continued. According to the financial data in April, the power of credit expansion of residents and enterprises is limited. In order to achieve stable growth, the government needs to expand and stabilize demand through the balance sheet, and monetary policy also needs to cooperate. The central bank recently mentioned for the first time that “the macro leverage ratio will rise”, which may indicate the marginal increase of monetary easing in the future. However, due to the cycle mismatch between China and the United States and the current low interest rate in the money market, the effect of blind easing is in doubt. On May 16, the central bank renewed the MLF with equal parity. The time point for the central bank to further relax in the future, or after the epidemic is relatively stable and the internal financing demand of the real economy recovers. In the case of relatively limited monetary policy, the urgency of fiscal policy is further highlighted. It is expected that the subsequent government finance will actively increase leverage and stabilize demand through the expansion of government balance sheet. In terms of economic data, based on the continuous easing of the national epidemic since mid April, the data in April is expected to become a low point, which will be gradually repaired later.
Risk tip: the change of epidemic situation exceeded expectations, the change of economic fundamentals exceeded expectations, and the change of monetary policy exceeded expectations
