China's exports defy intensified trade dispute

Emily Nicol
Chris Scicluna

Overview:
After a weak start yesterday, US equities subsequently regained their poise, with the S&P500 ending the day little changed. And with some reassurance provided by a stronger-than-expected CNY fix – albeit one that was still fractionally above the 7.00/$ mark – most Asian equity markets have made gains today. The mood in China was also supported by a stronger-than-expected showing for exports in the July trade report, helping the CSI300 to rise about 1¼%. In contrast, a very weak Economy Watchers survey (detail on this and more below) flagged cause for concern about economic conditions in Japan. But there was some better news for domestic producers of high-tech materials, with the authorities permitting the export to South Korea of EUV photo-resists, one of the three items used for the manufacture of memory and display panels restricted last month. The Topix, however, closed little changed on the day.

Major government bonds, meanwhile, have largely slipped back from yesterday’s highs, although USTs appear choppy after yesterday’s 10Y auction and ahead of a 30Y auction later today, while 10Y JGB yields remain close to -0.20%. Having plumbed new depths yesterday in the wake of the dire German IP report, 10Y Bund yields are up a couple of bps to close to -0.56%. And BTPs have weakened significantly (10Y yields up 9bps to above 1.50%) as expectations of a snap general election in the autumn rise further.

Japan:
While tomorrow’s preliminary estimate of Q2 GDP is likely to show that Japan’s economic expansion slowed considerably last quarter – our expectation is for growth of just 0.1%Q/Q from 0.6%Q/Q in Q1 – recent sentiment indicators suggest a deterioration in underlying economic conditions at the start of Q3 too. This was certainly the message from today’s Economy Watchers survey, which showed the headline current conditions balance declining for the third consecutive month in July and by 2.8pts to 41.2, well below the key 50-level indicating an improvement and matching the weakest reading since the post-quake trough in 2011.

Against the backdrop of the ever more challenging global environment, the survey flagged a notable drop in manufacturing-related demand, with the survey index declining 3pts to 41.3, the weakest for more than three years. But there was also a marked decline in the household-related DI, down 3.6pts to 40.0, similarly a more-than three-year low. While some of the weakness was attributed to bad weather in July, there is a general sense that the economic backdrop, associated with the heightened geopolitical tensions and unease surrounding the forthcoming consumption tax hike, has worsened. Indeed, the Economy Watchers anticipated a further deterioration in conditions over coming months, with the forward-looking DI falling to its lowest since May 2011.

China:
Against the backdrop of the intensification of the China-US trade dispute over recent months, today’s Chinese trade figures provided a modest upwards surprise. Contrasting with the expected decline, total exports rose 3.3%Y/Y in July, with a pickup in shipments to the EU (+6.5%Y/Y) and ASEAN countries (+15.6%Y/Y) offsetting a further fall in exports to the US (-6.5%Y/Y) and a steeper decline in shipments to Hong Kong (-15.7%Y/Y). This left exports in the year to date up compared with the same period last year. But the 0.6% increase on this basis compared with an increase of 12½%YTD/Y over the equivalent period in 2018. The drop in imports was softer than expected in July (-5.6%Y/Y), but there were still double-digit declines in imports from the US (-19.1%Y/Y, the eleventh consecutive year-on-year decline), Korea (-20.1%Y/Y), Japan (-13.0%Y/Y), and the UK (-22.4%Y/Y). Overall, however, the trade surplus narrowed to $45.1bn in July from $51.0bn the prior month.

Looking ahead, exports to the US might be expected to rise this month in an attempt to swerve the increased tariffs on consumer goods due to kick on 1 September. But they seem bound to fall back thereafter. And imports are likely to decline in response to the desire of the authorities to eschew US agricultural goods. And given the downbeat outlook for global demand as well as Trump’s unpredictability, the risks to China’s exports and imports likely remain firmly to the downside.

Euro area:
A quiet day for top-tier data from the euro area has this morning brought the Bank of France’s July business survey, which was arguably as upbeat as might have been hoped. The headline indices for manufacturing (a sub-par 95), services (a moderate 100) and construction (a relatively upbeat 104) were all unchanged from June, and signalled growth at the start of Q3 and expectations of ongoing expansion ahead. Indeed, overall, the findings of the survey led the Bank of France to suggest that GDP will rise 0.3%Q/Q in Q3, up 0.1ppt from Q2 and a rate which also matches our own forecast.

Contrasting with yesterday’s dire German figures, this morning’s Spanish IP data came in better than expected. In particular, total output declined a much smaller-than-expected 0.2%M/M, to leave output up 1.8%Y/Y. Admittedly, this in part reflected a pickup in energy production (0.9%M/M). But while production of capital goods was also firmer (+1.1%M/M), there was a decline in output of intermediate (-0.2%M/M) and consumer goods (-1.9%M/M). Nevertheless, despite the soft end to the quarter, production of consumer goods was still up almost 1½%Q/Q in Q2, matching the increase in Q1. And overall, total industrial output was still up a solid 0.9%Q/Q in Q2.

UK:
The overnight release of the RICS residential market survey for July further illustrated the ongoing torpor in the UK’s housing market. Despite a pickup in buyer enquiries last month, surveyors suggested that agreed sales were lower in July. Moreover, the survey’s headline house price balance fell further into negative territory last month, fully reversing the modest pickup seen in June, with prices continuing to fall in London, the South East and East Anglia. And the outlook for prices remained downbeat too, with expectations for the year ahead falling to a seven-month low.

The uncertain economic outlook continues to dampen the outlook for the labour market too, with the KPMG and REC Report on UK jobs today suggesting that permanent staff appointments fell for the fifth month in a row in July, while recruitment consultants suggested temporary billings increased at the slowest rate for more than six years. The uncertain outlook is also impacting the supply of labour, with consultancies indicating still lower candidate availability.

US:
In the US, today will bring wholesale trade and inventories figures for June, alongside the weekly jobless claims figures. In the markets, the US Treasury will sell 30Y bonds.

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