China expands in line with forecasts, Erdogan promises rate cuts

Summary:

• Chinese economy grew in Q2 in the pace expected by analysts surveyed by Bloomberg
• Data for June from China beat expectations
• Recep Erdogan promises serious rate cuts as the country aims to curb inflation by the year-end, Turkish broadcaster reports

Stabilisation continues

The Chinese economy expanded 6.2% in annual terms over the three months through June, matching the median Bloomberg estimate. The data slightly eased concerns about economic growth in the world’s second largest economy being adversely affected by the ongoing trade spat with the United States. Even so, it was the slowest pace of growth in almost three decades as the authorities want the economy to be more consumption rather than exports-driven. Today’s GDP report showed an uptick in terms of GDP deflator, the broadest inflation measure in the economy, as it rose to 1.8% from 1.4% YTD. This could alleviate concerns with regard to deflationary risks given the latest inflation release for June producing the flat reading of producer price growth. Let us remind that Beijing rolled out massive stimulus into the economy earlier this year, including tax cuts as well as special bond issuance by local governments aimed at boosting infrastructure construction. Hence, these steps are apparently beginning to feed through into the economy. However, numerous external risks could still undercut Beijing’s efforts to revive growth, therefore one may expect that the second half of the year could be softer.

The Chinese economy met expectations in the second quarter in terms of GDP. Other releases for June came in well above forecasts. Source: Bloomberg

Along with the second quarter GDP we were also offered a slew of monthly releases for June, all of them easily beat expectations. First and foremost, industrial output grew 6.3% YoY (consensus 5.2%), retail sales jumped as much as 9.8% (8.5%) and investment spending in fixed assets without the rural sector picked up 5.8% since the start of the year (5.5%). In terms of investment expenditure one needs to underline that the private sector spending accelerated to 5.7% from 5.3% YoY, the public sector investment decelerated to 6.9% from 7.2%. It could be considered as another signal that government efforts to inject more cash into the economy are starting to kick in. The details related to retail sales suggest that a lot can be ascribed to auto sales as consumers were enticed by massive discounts in the past month, thus a solid jump could be trimmed to some extent this month. Also in June house prices grew 10.3% YoY compared to 10.7% YoY in May suggesting that Beijing does not want to fuel a bubble in the real estate. Finally, the unemployment rate in June ticked up to 5.1% from 5%. 

Rate cuts in Turkey

A week ago investors were shocked by a decision taken by Turkish President Recep Erdogan to dismiss the central bank’s governor. In turn, another interesting news from Turkey came in the past weekend as Erdogan promised serious rate cuts, according to the country's broadcaster Haberturk. He added that the country aimed to reduce inflation from more than 15% to single digits by the year-end and reached a target in rates at the same time. Erdogan repeated again his unorthodox notion that lower rates would see inflation moving significantly down. The TRY has yet to respond to these promises and the lira is trading just marginally down against the US dollar this morning. The next CBRT meeting is scheduled on July 25 with expectations signalling a 200bps rate cut.

The USDTRY trades nearby its important technical area. Taking the Erdogan’s promise to reduce rates into account one may arrive at a conclusion that the pair might drive higher in the coming weeks. Source: xStation5

In the other news:

• New Zealand’s services PMI fell in June to 52.7 from 53.5

• Bitcoin is down 15% after the gloomy weekend across other cryptocurrencies as investors were digesting Trump’s harsh words regarding digital currencies