The two-day meeting between the U.S. and China earlier this week failed to produce many headlines, but even if the U.S. had a hard time convincing China to let its currency appreciate, data released overnight in the Middle Kingdom may instead do the trick.
Chinese inflation continues higher, pressuring Beijing
If only the Chinese authorities had the conviction of Fed Chairman Bernanke that inflation is only transitory they could leave their 'money printing+export-led growth' economic model as it is, but unlike the U.S. central bank chief the Chinese are keenly aware that higher inflation hurts its consumers through a loss of purchasing power (and savings). Especially since food represents such a big chunk of the Chinese Consumer Price Index (CPI).
U.S. Treasury Secretary Geithner may have a hard task ahead of him in the first two days this week in trying to convince China to allow its Yuan to appreciate further than the roughly 4 percent it already has strengthened against the USD, but what Geithner could not get the Chinese to do, perhaps inflation figures from overnight can. CPI remains high at 5.3 percent year-on-year (from 5.4 percent) though prices at the producer level (PPI) decelerated somewhat to 6.8 percent from 7.3 a month earlier. The Money Supply, both M1 and M2, also decelerated to 15.3 and 12.9 percent from 16.6 and 15 percent, respectively, further pointing out that China is indeed doing something to slow its economy. However, while Beijing is taking steps they are still small as suggested by New Yuan Loans, also out overnight, which rose to 740 billion from 679 billion a month earlier, signalling that credit is still growing robustly. To round off the data releases, Retail Sales and Industrial Production both came in a bit below expectations with both decelerating.
U.S. Trade Balance to deteriorate
Like Inventories the Trade Balance is estimated by the Bureau of Economic Analysis in its first release of a new quarterly GDP report as trade data is not timely enough to allow a quick enough release. Hence today's report may cause further damage to the already weak 1.8 percent quarter-on-quarter annualised growth rate in GDP, which was released a few weeks ago, if the trade deficit comes in larger than what the BEA used as an estimate in its initial report.
In addition, it was quite interesting to note the surge in the Chinese trade surplus yesterday, which rose to $11.4 billion in April from just $0.1 billion in March. Is this an early warning that the U.S. Trade Balance may weaken significantly in the April report, out next month, and possibly impact GDP growth in the second quarter?
Other macro data today
The U.K. like its big sister across the pond to the West will release trade data today and consensus expects it to weaken to £-3.2 billion in March from £-2.4 billion in last month's release though we note that the last two months' trade deficits have been much smaller than seen in the second half of 2010 and hence should aid GDP if the trend can be continued. In the U.S. we have a few Fed policymakers speaking on interesting topics such as economic outlook and monetary policy.