Chinese exports defy US tariffs
By Vincent-Frédéric Mivelaz
China’s trade surplus with the US continues to reach record highs, at USD 34 billion in September from August’s USD 31 billion. It’s probably unsustainable, as the Trump Administration’s tariffs on USD 200 billion of Chinese goods went live on 24 September. The planned Trump-Xi meeting on 30 November/1 December 2018 will be tense, if it even takes place. Globally, Chinese exports rose 14.5% (prior: 9.10%), largely above expectations of 9.80% while imports at 14.30% remain lower for the second consecutive month (prior: 19.90%), thanks to competitive advantage of a weaker renminbi.
10% tariffs could be increased to 25% by year-end, if no progress in US-China trade is made. This could hammer China and its manufacturing sector. US consumers are robust spenders, but the 10-25 hike would weigh heavily on Chinese exporters. China’s economy appears resilient, although worries related to growth remain. The central bank’s challenge is to balance liquidity and credit to support the economy and safeguard against a credit collapse, which would bring on a recession.
Sinking the yen
By Peter Rosenstreich
USD/JPY spent the summer recoupling with interest rates, and yen weakness helped the Nikkei rise nearly 2000 points in September. There are real sign that the effects of “Abenomics” are fading and the real economy is slowing. The Business Conditions Index for large manufacturers has fallen 2 points: industrial production remains weak. Perhaps the lone bright spot for Japan is export orders embedded in manufacturing’s purchasing index, which increased 1.2 to 50.9. Inflation remains weak. Markets speculate that Japan might change the economic policy mix, ending the current accommodating monetary policy and trigger the start of normalization. However, the negative direction of growth and positive movement of inflation suggest that nothing meaningfully will be adjusted. Prime Minster Shinzo Abe’s landslide victory on 20 September suggests that Abenomics will be maintained for the remaindered of his tenure.
Despite marginal inflation, the Bank of Japan remains far from its 2% inflation target. Markets should not expect material changes. With policy a core reason for JPY weakness the renewed support for Abenomics should create momentum for further JPY weakness (recoupling with historically dominate US-JP interest rate spread). That said, geopolitical uncertainty and fears of US protectionism and higher interest rates could trigger renewed safe-haven seeking and stronger JPY.