Is China’s economic rebound sustainable?

Will the renminbi sink further this year?

The renminbi has declined more than 2 per cent against the dollar over the past month, breaking the Rmb7 per dollar level and hitting its weakest point since early December, when the country was still in the process of dismantling its throttling zero-Covid curbs.

The decline is in response to warnings from the US Federal Reserve that it may raise domestic interest rates further, while there are growing doubts over the sustainability of China’s economic rebound.

Analysts had expected a strong recovery following the unwinding of the country’s coronavirus restrictions last year. But weak Chinese economic data for April, including record youth unemployment and slower than expected industrial production and consumer spending growth, has clouded the outlook.

Kiyong Seong, lead Asia macro strategist at French bank Société Générale, now expects the onshore renminbi to fall to Rmb7.3 per dollar in the final quarter, and to remain at that level for the first three months of 2024. That is down from an earlier forecast of Rmb7 per dollar in the first quarter of 2024.

“We had thought that stronger sentiment thanks to China’s abrupt reopening and the subsequent improvement in some economic data points would strengthen the CNY,” wrote Seong. “But this has not materialised.”

Seong said it was more likely that the People’s Bank of China would cut interest rates than increase them given April’s data, deepening the rate divergence with the US. Any rate cuts “would be neither sufficient nor efficient in terms of promoting sustained growth”, he added.

“Further monetary policy divergence between China and the US with no material positive impact on Chinese growth would be a perfect recipe for a weaker CNY.” William Langley

Is UK inflation starting to fall?

UK inflation is expected to fall sharply after a fall in energy prices, boosting traders’ hopes that the Bank of England will hold interest rates at its next meeting.

Headline inflation to be released on Wednesday is expected to have fallen to 8.3 per cent in April compared with 10.1 per cent in March, according to a consensus of economists polled by Reuters.

Samuel Tombs, economist at Pantheon Macroeconomics, who also predicts inflation will have eased to 8.3 per cent, said that outcome “would strengthen the case for the monetary policy committee to keep the bank rate at 4.50 per cent at its next meeting on June 22”.

Markets are pricing in that the Bank will raise rates for the 13th consecutive time, pushing the bank rate to 4.75 per cent, the highest level since 2008.

The expected fall in UK inflation in April should also narrow the gap with other countries. In March, the UK annual rate of consumer price index growth was double that of the US and much higher than the 6.9 per cent in the eurozone.

Ben Broadbent, BoE deputy governor, said this month that March inflation figures marked “probably the maximum gap” with other advanced countries. This is because UK utility bills rose sharply in April last year after Russia’s full-scale invasion of Ukraine. Prices have since fallen back.

“We have a very big base effect coming in for the April number . . . those base effects have come through rather faster in continental Europe,” noted Andrew Bailey, BoE governor. Valentina Romei

How badly have interest rates damped US manufacturing and services activity?

Investors will scrutinise business sentiment surveys closely on Tuesday for clues about how much higher interest rates and slowing economic growth are damping US manufacturing and services activity.

Economists polled by Reuters expect S&P Global’s manufacturing purchasing managers’ index to give a reading of 50 for May. That number, which reflects industry views on operating conditions, would mark a slight retreat from 50.2 in April, and would land squarely on the line that separates contraction — anything below 50 — from expansion.

Last month’s manufacturing reading was the first to post above the “neutral” level for six months, and the highest since October. At the time, S&P’s chief business economist pointed to improved supply chains and new order inflows, hinting at a “tentative revival of demand”.

Meanwhile, economists expect the early, or “flash” reading, for S&P’s services PMI to come in at 52.6 on Tuesday — lower than April’s figure of 53.6, but still signalling growth from the previous month.

The PMI surveys come as data in recent weeks showed that inflation in the world’s largest economy has continued to ease, hitting its lowest level in two years in April. But economic growth also slowed sharply at the start of this year, at 1.1 per cent on an annualised basis between January and March.

Jay Powell, chair of the Federal Reserve, said on Friday that the credit crunch expected in the wake of bank failures could limit how far the central bank needs to raise interest rates. The future path of monetary policy tightening is a crucial contributing factor both to economic growth rates and inflationary pressures on US companies. Harriet Clarfelt