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China’s Q1 GDP strong, but other indicators point to weakness

A review of the week’s top global economic and capital markets news.

Investment Solutions Group

For the week ending 19 April 2024

As of midday Friday, global equities were lower on the week amid heightened geopolitical tensions. The yield on the US 10-year note rose 12 basis points to 4.63% from a week ago while the price of a barrel of West Texas Intermediate crude oil fell from 85.45 last Friday to 83.08. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 18.7 from 17.3.

MACRO NEWS

China’s economic growth beats expectations, but signs of weakness remain

China’s economy grew 5.3% in the first quarter, beating expectations. The strong growth was primarily contained in the first two months; however, while in line with the government’s 5% target, several other indicators point to concerns about future economic activity. Factory output in March grew 4.5% year over year, compared to 7% the prior month, while retail sales rose 3.1% versus 5.5% in February. The property sector remains a major headwind, with sustained operational difficulties, liquidity pressures and low consumer confidence. Property investment fell 9.5% year over year and new home prices fell at the fastest pace in eight years to 2.2% year over year. The Hang Seng Mainland Property Index slumped 19% year to date, 50% from a year ago. The property crisis, combined with rising government local debt and weakening consumer spending, pose a challenge for economic momentum. Despite growing signs of weakness, the People’s Bank of China decided to hold rates steady at 2.5% amid concerns over currency stability.

Mideast tensions remain elevated

In a move against Israel for the air strike on its Damascus consulate last week, Iran launched drones and missiles toward Israel on Saturday, the first time Iran has directly attacked Israel from its own territory. The majority of the missiles were intercepted by Israeli, American and other allied forces, minimizing damage. Over the years, Iran has built out diplomatic ties with American rivals and enhanced its military capabilities. The attack marks a strategic shift, ending the “shadow war” that Iran and Israel have been engaged in for decades. In response, the US announced sanctions against Iran’s steel and drone companies. Additionally, Israel retaliated Thursday night with a strike in central Iran where nuclear facilities and an air base are located. The extent of the impact is currently unclear, but the strike appears to be limited, with minimal damage. Oil prices have fallen more than 3% this week and heightened geopolitical risks in Israel prompted S&P Global Ratings to lower Israel’s long-term foreign and local currency sovereign credit ratings from AA- to A+.

Inflation on the right track across several regions

Canada’s prices ticked up slightly in March to 2.9% from a year earlier due to higher gasoline prices, but have steadily been slowing. The Bank of Canada expects inflation to subside to its 2% target next year, and is slated to cut rates in June. The European Central Bank is also expected to cut rates in June as prices further slow to 2.4% year over year. Similarly, the UK’s inflation print came in at a slower pace of 3.2% year over year. The probability the Bank of England will cut rates in the summer increased as labor markets cooled, with unemployment rising to 4.2% and wages slowing to 6% in March. Meanwhile, Japan’s core inflation, which excludes fresh food and energy, and is the Bank of Japan’s key measure, fell to 2.9%, but remains above the 2% target.

QUICK HITS

The International Monetary Fund revised its global growth expectations upwards from 2.9% to 3.2%, primarily driven by a stronger-than-expected US economy.

Existing home sales in the US fell 4.3% month over month in March as mortgage rates surged to 7.1%. New residential construction plummeted 14.7% from a month ago, the largest drop since April 2020. Meanwhile, Canada’s existing home sales were steady, rising 0.5% MoM, but housing starts fell 7%.

US President Joe Biden proposed new tariffs on China this week, in a move to increase production and employment in the steel sector within the US. If implemented, the United States will increase levies from 7.5% to 25% on certain Chinese steel and aluminum products. Following this announcement, China implemented a levy of 43.5% on US imports of propionic acid, a widely used chemical for animal feed (to prevent mold), pesticides, herbicides and drug development.

In its annual budget plan, Canada revealed plans to raise capital gains taxes from 50% to 67% on corporations and wealthy individuals, which is estimated to generate around $19 billion over the next five years. The additional revenue is slated to fund measures to increase housing supply, improve health care and feed school children.

Japan has seen an increased demand for autos and semiconductors, boosting exports by 7.3% year over year, marking four consecutive months of growth. Shipments to China and the US were the main drivers, rising 12.6% and 8.5%, respectively.

Australia’s unemployment rate rose slightly to 3.8% in March, a sign that the labor market remains tight. Economists predict that the Reserve Bank of Australia will be one of the last major central banks to cut interest rates as inflation remains sticky.

Prices in New Zealand rose 4% from a year ago, the smallest increase in almost three years. The Reserve Bank of New Zealand indicated that they will keep rates steady until they see inflation further subside towards their 1% to 3% target.

EARNINGS NEWS

With just 14% of the constituents of the S&P 500 Index having reported for Q1 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings slightly rose around 0.2% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 3.6% year over year.



Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your investment professional, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.

The views expressed in this article are those of MFS and are subject to change at any time. No forecasts can be guaranteed.

Past performance is no guarantee of future results.

Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.

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