Editor's Note: Below is an excerpt transcribed from a recent edition of The Macro Show hosted by U.S. Macro analyst Christian Drake and Macro analyst Ben Ryan. Click here to learn more about The Macro Show.
Christian Drake: It’s good to Xi Jinping because it's good to be king. When you don’t have to be elected you can more easily absorb moves like this. The Shanghai Composite is not showing any follow through on yesterday’s rally domestically. The Shanghai Comp was down -22 basis points last night and down a pretty harrowing -26% from its year-to-date peak. We’re still sellers of that exposure with the outlook being what it is. Our forecast continues to be that China is looking at a stagflationary environment over the next couple quarters.
Drake: We also got the China trade data, which actually beat expectations. I don’t think that’s that much of a surprise. Chinese exports to the U.S were up 15.6% year-over-year in October. The Chinese trade surplus in aggregate topped $34 billion. The trade balance in the U.S. is the primary focus. That moderated slightly off the all-time highs highlighted in green there. It was down to $31.78 billion in the latest month.
Drake: What’s happened over the last few months is pretty clear. Remember the 3Q 2018 U.S. data? Net exports were a significant drag to GDP highlighted in red there. What you had was a big import surge. Most of that was associated with a front-running of tariff implementation so, ‘Let’s import what we can before we have to pay for it.’ You saw that in the trade balance data with China. Those are the peaks in the previous chart.
Drake: And on the other side, the inventory component. Those two things are not mutually exclusive. You see investment was down, whether you’re talking about non-residential or residential investment, but the inventory build was big. A lot of that has to do with trying to front-run tariff implementation which is the other side of the trade deficit. So a little bit an offset between these two dynamics.
This probably moderates here as we go into the 4th quarter. It doesn’t look like we’ll get an outright reversal but remember the tariffs did go into effect and there may be additional. So you could see some additional front running as people come to the realization and accept that it is the prevailing reality that those 10% tariffs could go up to 25%. So you may see some residual build into that into the beginning of the year.