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China Trade Balance and Westpac Consumer Confidence

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The FT published a report over the weekend warning of the economic recovery in China that could have knock-on effects to commodity currencies, in particular the Aussie. This comes after the RBA last week warned that at least one more rate hike was likely. Iron ore prices took around a 10% hit last week, continuing a downward trend for over a month.

Overnight, NAB Business confidence split the difference between expectations and the prior. At flat, it was above the -1 last month, but below the +1 expected. The indicator suggests that Australian businesses are in a holding pattern to see how things evolve. Consumers are expected to be more pessimistic, with Westpac Consumer confidence expected to record a -4.3% drop compared to 9.4% prior.

What the report says

The Financial Times over the weekend compiled a series of comments from high-profile western companies that were warning earnings could be hit from China’s slow recovery. The conclusion from many was that many people had overestimated China’s post-covid recovery, and that the growth prospects were overly optimistic.

Many of these companies were centered around the consumer goods sector, such as Estee Lauder, Starbucks and Hilton, saying their growth hadn’t matched expectations over the last few months. This points to a sluggish domestic market with Chinese consumers reluctant to spend. But there are also signs of issues outside of China. Finnair, for example, said that business travel to and from China has not picked up as much as anticipated. NXP Semi is understandably also seeing pressure as the EU looks to limit China’s access to high-tech chips.

The trade outlook

China’s trade surplus is expected to shrink considerably when it’s reported tomorrow, down to $76.0B from $88.2B reported in March. Once again this narrowing is expected to be driven by the growth gap between imports and exports.

Exports are expected to have grown 9.0% annually, which would be impressive if it weren’t compared to the 14.8% reported in March. The slowdown in export growth could be a sign of global economic malaise, which could further weigh on the domestic market. Imports are expected to show the weakness of internal Chinese demand, though have an improvement compared to the prior month. China’s imports are expected to have grown 1.1% y/y, compared to -1.4% in March. But, this could also have more to do with the drop in imports seen in April of last year as China tightens covid restrictions.

Hiking into the storm

If China’s demand were to slow down, it puts the RBA into an awkward position for the next meeting. Already the RBA surprised markets by hiking last time. Last week, its statement on monetary policy assumed that there would be another rate hike, but a “half” one to bring rates back into line with the quarter point moves. That is, the RBA policy statement expects a 15bps hike to 3.75% from 3.60% currently, and then holding rates steady from there on out.

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