In this publication: Chinese trade data illustrative for weakness in domestic and global demand. However, numbers should be interpreted with care given various distortions. Fed policymakers continue to show uncertainty before March’s FOMC meetings. We expect the Fed to remain on hold in the coming year.
Global-Daily-Insight-9-March-2016.pdf (65 KB)
Contraction of China’s merchandise exports deepened in February …
China’s trade data for February showed ongoing weakness, although the numbers are distorted and should be interpreted with care. In USD terms, merchandise exports fell by 25.4% yoy in February (January: -11.4%), while markets had expected a drop of only 14.5%. The weakness was broad-based, with exports to both the US and the EU tumbling by 20-25%. Still, China’s trade data at the start of the calendar year are typically affected by the timing of the Lunar New Year break. In February 2015, export growth was remarkably strong (48.3% yoy), as a significant part of the disruption from the New Year break was pushed into March 2015. In 2016, the break was earlier in February, so the downward impact on the February number was stronger. Furthermore, lower export prices also might have played a role. However, even taking these distortions into account, the ongoing weak export performance is also illustrative for the weakness in global demand, which seems to have had a stronger impact than the real effective appreciation of the yuan over the past years.
… while the decline in merchandise imports eased somewhat
Meanwhile, the decline in China’s merchandise imports fell to 13.8% yoy in February (January: -18.6%), a bit more than markets had expected (-12%). Imports data are distorted too, reflecting special factors such as the timing of the Lunar New Year, the effects of strategic buying in December, and the curtailment of overinvoicing practices set up to hide capital outflows. Moreover, while the import numbers partly reflect the weakness of domestic demand, particularly in the areas of industry and investment, they are still largely shaped by the sharp drop in import prices, particularly commodity prices. Estimated import volumes show signs of bottoming out in late 2015, although the latest estimate is for December 2015.
Given all kinds of distortions, drawing too strong conclusions is inappropriate
Whereas we were not overly optimistic regarding the bottoming out of imports and exports in December 2015, we are not overly pessimistic now either. Drawing too strong conclusions on the January and February trade data is not appropriate, given the distortions surrounding the Lunar New Year break and other special factors. Trade data for the coming months should provide a clearer picture.
Fed policymakers continue to show uncertainty before March’s FOMC meeting
In the past few days Fed policymakers have had a cautious tone, but also divergence in views regarding the outlook. The Fed will hold its next FOMC meeting in 15-16 March. We think that the Fed will not hike in this meeting and will likely remain on hold in the coming months.
Fed Vice Chair Fischer slightly optimistic on inflation, but cautious on growth
In a speech held in Washington on Monday, Chair Stanley Fischer discussed among other topics inflation, productivity and the effectiveness of monetary policy at the zero lower bound. On inflation he mentioned that “we may be well at present seeing the first stirrings of an increase in the inflation rate – something that we would like to happen”. He supports the view that the link between inflation and unemployment – although weaker – still exists. This came alongside more cautious remarks on productivity, a major determinant of long-term growth. He mentioned that ‘at this stage we simply do not know what will happen with productivity’. As for monetary policy he defended the effectiveness of quantitative easing and negative rates as instruments to expand monetary policy.
Brainard cites downside risks and calls for prudent hikes
Another FOMC policymaker Lael Brainard, considered a dove, mentioned that the US economy was not immune to foreign developments, given the impact of the weak and decelerating foreign demand and the drag of energy related activities. She raised concerns regarding the low level of market based inflation compensation. She called for careful adjustment of monetary policies to preserve the expansion.