We saw Q1 GDP figures from China exceeded market expectations by a considerable margin, with headline growth reaching 5.3% year-on-year, surpassing the consensus of 4.8% and the previous quarter’s 5.2%.
The robust performance in Q1 GDP largely stems from stronger January-February data, particularly in industrial production and exports. However, March’s data presents a contrasting picture, with activity, trade, credit, and prices showing signs of weakening, indicating a slowdown in growth momentum during the past month.
Notably, while real GDP growth stood at 5.3%, China’s nominal GDP growth only reached 4.2% year-on-year in Q1, suggesting a negative GDP deflator of -1.1%.
In March alone, retail sales growth missed expectations for the fifth consecutive month, registering 3.1% year-on-year compared to a Bloomberg consensus of 4.8%, down from 5.5% in January-February. Industrial production growth also disappointed, moderating to 4.5% in March following a temporary surge to 7% in January-February.
Moreover, the contraction in property investment intensified to -10% year-on-year in March from -9.0% in the first two months of the year, while infrastructure investment softened to 8.6% year-on-year from 9.0% in January-February.
Meanwhile, the US dollar’s ascent continues, bolstered by robust retail sales data and a shift in Federal Reserve rate cut expectations. Overnight, the dollar index surged to a new high for the year, reaching 106.39.
This surge follows the release of a stronger-than-anticipated US retail sales report for March, with control retail sales climbing by a notable 1.1% month-on-month, marking the most substantial monthly increase since January 2023. Additionally, upward revisions to retail sales growth in January and February suggest a more modest slowdown in consumer spending for Q1 than initially forecasted, with annualized growth surpassing 3.0% in the latter half of last year.
The robust US growth momentum at the year’s outset has exerted upward pressure on US rates and the dollar alike. The 10-year US Treasury yield surged to a fresh year-to-date high of 4.66%, marking an 88-basis-point increase since the year-end low.
Market observers eagerly await insights from Federal Reserve officials, particularly Fed Chair Powell, regarding adjustments to monetary policy amidst recent data indicating robust US activity and inflation.
While New York Fed President Williams downplays recent inflation figures as not constituting a “turning point,” he acknowledges their influence on policy outlook and forecasts. Williams maintains the view that the Fed may commence rate cuts this year if inflation gradually subsides. Additionally, concerns surrounding escalating tensions between Israel and Iran loom, though initial market reaction remains subdued. The situation, while being monitored closely by Fed officials, has yet to significantly impact the US economic outlook.
Geopolitical uncertainties and the potential for a global energy price shock further underscore the relative appeal of the US dollar in the near term. With geopolitical tensions simmering and energy markets on edge, investors continue to flock to the stability of the US currency, driving its ongoing strength
.Market commentary and analysis from Luca Santos, currency analyst ACY Securities
