Brief Macro: China – Eurozone Negative Feedback Loop. and more

In this briefing:

1. China – Eurozone Negative Feedback Loop.
2. Non-Performing Loans in China
3. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks
4. Monetary & Supply Side Takeaways From U.S. GDP

1. China – Eurozone Negative Feedback Loop.

Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit,  this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China. 

2. Non-Performing Loans in China

We have all seen the think-pieces in western media talking about China’s economic slowdown. Much of content that western audiences understandably focus on is the effect the trade war has on the downturn. However, we ran across a piece of data entirely driven by China that gives us pause. The amount of non-performing loans has only continued to increase. Yet, according to a trusted source 2 trillion RMB has been shifted off of the books in China. This tells us that China cannot do enough to get rid of NPLs.

3. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

4. Monetary & Supply Side Takeaways From U.S. GDP

• The U.S. GDP report released earlier this week contains some interesting information on U.S. growth and inflation trends and risks for 2019. 
• First, the economic growth strengthened in the fourth quarter as year-over-year real GDP growth firmed to 3.1%, which made 2018 the strongest year for growth since 2005. 
• Second, our core measure of demand (C+I) also grew at 3.1%, which means swing factors played little role in this growth performance (indeed the average contribution from inventory investment of 0.4% points was mostly offset by a widening of the trade gap that subtracted 0.3% points from growth). 
• Third, this strong growth performance accompanied by only a 0.3% point drop in the unemployment rate in 2018 suggests that potential growth in 2018 firmed to around 2½%.  The source of this faster potential growth has been rising labor force participation rather than faster productivity growth, which raises questions to its sustainability since aging of the population is likely to keep downward pressure on participation. 
• Fourth, nominal GDP growth of 5.3%, which is the fastest since 2005, suggests that monetary policy has reflated this important indicator to a pace that was viewed as desirable when trend real growth was at 3% since this would accommodate a 2% inflation rate.  However, if nominal GDP growth remains above 5% but real GDP growth slows towards trend (of 2½% or lower if the pick up in labor force participation stalls out), we would see inflation rising above the Fed’s target.