The ECB monetary policy meeting followed by Fed Minutes left investors rather confused as to where both economies are heading. One sure thing is that both monetary authorities have clearly signaled that it is premature to take further decisions on the forward guidance for the time being, thus pushing investors towards further caution. Yet encouraging news are arising from the second largest economy, whose government’s effort to boost domestic demand is finally taking effect.
Not only did China’s factory activity expand, but consumer inflation also showed good improvement in March. The uptick of Manufacturing PMI back into expansion territory, its highest range in 8 months as well as accelerating producer prices to 0.40% (prior: 0.10%) from last year are good signs that stimulus measures are helping. Although 5-months high headline CPI at 2.30% (consensus: 1.50%) does not necessarily provide sufficient proof of rise due to a major bias in inflated pork prices (i.e. supply shortage due to African swine fever), the non-food metric is also showing decent improvements, bouncing by 10 bps at 1.80% after having flattened in the past 3 months. Although the latest results are to be taken with a tweezers and need to be monitored in the coming months, it appears that the Chinese economy is most likely recovering. Aside of Beijing’s plan to increase infrastructure spending, a reduction of corporate tax of 2 trillion yuan ($297.8 billion) and an effective VAT tax cut of 3 percentage points for manufacturing firms, Sino-American trade talks appear to go on the right direction and on the verge of signing a final agreement on the implementation of an enforcement mechanism.
USD/CNY sideways trading since end-February 2019 along the range of 6.7115 is expected to sustain until sizable events emerge.