Is China’s economic recovery sustainable?

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Will the renminbi fall further this year?

The renminbi fell more than 2% against the dollar in the last month, surpassing the 7 Rmb per dollar level and touching the weakest point since the beginning of December, when the country was still in the process of dismantling its anti -Covid.

The decline is in response to warnings by the US Federal Reserve which could further raise domestic interest rates, while doubts are growing about the sustainability of the Chinese economic recovery.

Analysts had expected a strong recovery after the country’s coronavirus restrictions were lifted last year. But weak Chinese economic data in April, including record youth unemployment and slower-than-expected growth in industrial production and consumer spending, clouded the outlook.

Kiyong Seong, Asian macro strategist at French bank Société Générale, now expects the onshore renminbi to fall to Rmb7.3 per dollar in the latest quarter and remain at that level for the first three months of 2024. Earlier forecast of Rmb7 for dollar in the first quarter of 2024.

“We had thought that stronger sentiment from China’s sharp reopening and subsequent improvement in some economic data would boost the CNY,” Seong wrote. “But that didn’t materialize.”

Seong said the People’s Bank of China was more likely to cut interest rates than raise them given April data, deepening the rate divergence with the US. Any rate cuts “would be neither sufficient nor effective in terms of promoting sustained growth,” she added.

“Further monetary policy divergence between China and the US with no positive impact on Chinese growth would be a perfect recipe for a weaker CNY.” William Langley

Is inflation in the UK starting to come down?

UK inflation is expected to fall sharply after a drop in energy prices, fueling traders’ hopes that the Bank of England will hold interest rates at its next meeting.

According to a consensus of economists polled by Reuters, headline inflation due to be released on Wednesday is expected to have eased to 8.3% in April from 10.1% in March.

Samuel Tombs, an economist at Pantheon Macroeconomics, which also expects inflation to fall to 8.3%, said the result “strengthens the case for the monetary policy committee to keep the bank rate at 4.50% next meeting of June 22”. .

The markets are pricing in the fact that the The bank will raise rates for the thirteenth time in a row, pushing the bank rate to 4.75 percent, the highest level since 2008.

The expected drop in UK inflation in April should also narrow the gap with other countries. In March, the annual growth rate of the consumer price index in the UK was double that of the US and much higher than 6.9% in the eurozone.

Ben Broadbent, deputy governor of the BoE, said this month that March inflation data marked “probably the widest gap” with other advanced countries. That’s because UK utility bills soared in April last year after Russia’s full-scale invasion of Ukraine. Since then the prices have come down.

“We have a very large base effect coming up for the April issue. . . these base effects have been playing out rather quickly in continental Europe,” noted Andrew Bailey, Governor of the BoE. Valentina Romei

To what extent have interest rates dampened manufacturing and service activity in the United States?

Investors will be closely scrutinizing business sentiment surveys on Tuesday for clues about how much higher interest rates and slowing economic growth are holding back manufacturing and services activity in the US.

Economists polled by Reuters expect the S&P Global’s manufacturing purchasing managers’ index to give a reading of 50 for May. That number, which reflects industry views on operating conditions, would mark a slight decline from April’s 50.2 and land squarely on the line between contraction — anything below 50 — from expansion.

Last month’s manufacturing reading was the first to break above the “neutral” level in six months, and the highest since October. At the time, the S&P chief business economist pointed to improving supply chains and an influx of new orders, hinting at a “temporary awakening in demand.”

Meanwhile, economists expect the advance reading, or “flash,” for S&P’s services PMI to come in at 52.6 on Tuesday, lower than April’s figure of 53.6 but still signaling growth relative to the previous month.

The PMI surveys come as data in recent weeks showed inflation in the world’s largest economy continued to fall, hitting a two-year low in April. But economic growth also slowed sharply earlier this year, to 1.1% year-on-year between January and March.

Jay Powell, chairman of the Federal Reserve, said on Friday that the expected credit crunch in the wake of bank failures could limit the extent to which the central bank needs to raise interest rates. The future path of monetary policy tightening is a crucial factor contributing to both economic growth rates and inflationary pressures on US corporations. Harriet Clarfelt