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China trade boosts stocks; Japan inflation creeps

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China stocks higher on better trade outlook

By Peter Rosenstreich

US-China trade discussions are making progress. Six memoranda of understanding are in draft that cover technology transfer and cyber theft, intellectual property rights, currency, agriculture and non-tariff barriers to trade. Expectations are that a 1 March tariff-hike will be avoided. A US-China deal is unlikely to spark a double-digit rally, but it will support Chinese shares. Chinese stocks reacted sharply, climbing nearly 2.0% today. After a deep correction in 2018, they have been on a rally since November, up over 20%. The largest gainer was Shanghai Aerospace Automobile Electromechanical, up 10%.

The Chinese central bank has not cut its key interest rate. It has focused on micro tuning market-based rates, increasing credit growth and lowering borrowing costs. Still, a cut is coming, in our view, and it will profoundly affect domestic equity prices. Despite clear signs of global deceleration, China’s economy is stable. January sales of passenger vehicles in China collapsed 18% to just over 2 million. January home-price growth slipped to a 9-month low, showing the property markets are cooling as the economy softens.

Japan inflation improves slightly

By Vincent-Frédéric Mivelaz

After the Bank of Japan cut its 2019 outlook for core inflation, the rate has improved, with the core gauge at 0.80% (prior: 0.70%) in January. Yet private consumption in the country declined in January, while a February manufacturing PMI of 48.50 pointed to recession for the first time in 30 months. It seems that Japanese inflation is struggling to take off, although a time lag of several months might partially explain it. Headwinds are on the way, starting with a consumption tax hike from 8% to 10% planned for October 2019. The BoJ is not expected to change its current monetary easing course at its 15 March meeting. The inflation target of 2% remains distant, unreachable before 2021.

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