Today China’s National People’s Congress reduced its economic growth target to 6.00-6.50%, announced a policy of “easing for stability” and initiated meaningful tax cuts. Policy remains focused on fiscal stimulus over credit expansion. However, we anticipate the central bank will cut benchmark interest rates by 1.5% by the end of 2019. Despite weak domestic growth, GDP will stabilize increasing demand for Chinese assets. The yuan’s bullish run will slow, as markets reduce emphasis on trade tensions and increase focus on the falling current account balance
Mixed news in Europe
The economies of France and Germany are slightly recovering. Italy’s annual GDP figures indicate a technical recession: mid-duration yields are starting to tick upwards with 10-years at 2.75%. That’s 1% below Greece (highest in EU), but Greek yields are falling while Italy’s are heading higher. At the European Central Bank meeting this Thursday, President Mario Draghi and colleagues will have to address deceleration in Euro area. ECB’s growth forecasts remain overly optimistic at 0.4% quarterly. ECB will likely maintain its policy.
Annual growth and inflation estimates are likely to be cut in June. ‘Targeted longer-term refinancing operations’ will capture market attention, but with little impact on the real economy. Elsewhere the Central bank of Turkey is expected to hold its rate at 24%. The CBRT is expected to wait until disinflation entrenches, before cutting interest rates. The environment looks right for carry strategies, making TRY an attractive long with CHF a solid funding option.
