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“There will be no flood-like stimulus.”
-Chinese Premier Li Keqiang at the World Economic Forum in Dalian, July 2nd 2019 

Thanks, Li. It took only about ~six months for our view that Beijing hasn’t eased monetary or fiscal policy enough for the mainland economy to do anything other than potentially stabilize against easing comparative base effects to become consensus. 

We like staying 3-6 months ahead of investor consensus on all relevant economic matters. That’s our sweet spot. Whether or not Mr. Market… 

a) agrees with my outlook; or
b) has already priced it in 

… is the hard part. Thanks to modern computing tools, the measuring and mapping of Growth, Inflation, and Policy/Profits cycles has never been easier. 

Back to the Global Macro Grind… 

What did Mr. Market price in yesterday? What is he pricing in today? 

Well, after yesterday’s post-trade-truce-inducing-rip-roaring-fun in the Shanghai Composite Index (up +2.2%), the A-Shares finished flat today on the sobering reality that the US and China remain uncomfortably far apart on a meaningful trade deal. Per Xinhua, the official mouthpiece of the Chinese Communist Party: 

“The truce does not necessarily mean a deal is imminent and much work needs to be done.” 

As I wrote in yesterday’s Early Look, the two sides would do well to wait until about ~December to announce a trade deal. Any sooner than that and they run the risk of wasting all this fine political theater on a further slowing of their respective economies – which are both still cycling down the backside of the original Shanghai Accord and “historic” tax reform in the US, which was followed by a cumulative $633 billion increase in federal expenditures over the past two years. 

To the extent you have not yet had the chance to review, last Wednesday we hosted our Q3 2019 Macro Themes presentation in which we detailed our outlooks for the US and Chinese economies, with the latter view delivered in the context of our #PeakUSD thesis. 

In response to that analysis, we had a prospective client email us with what I thought was one of the more thoughtful follow-up questions we’ve received in recent quarters: 

“Keith talked about the tough comps on the Chinese economy, as well as China’s monetary policy transmission mechanism being impaired, which compromises credit growth and the recovery in domestic demand. However, you guys have China moving to Quad 1 on 3Q19... How do I reconcile these (what seems to be) different views? Is it possible for the Chinese economy to accelerate in the 3Q19 with credit growth decelerating?” 

In short, anything is possible when it comes to the tightly managed Chinese economy, but you didn’t need me to tell you that. 

What you’d like me to explain are the balance of pros and cons that lead us to anticipate a rather tenuous inflection into #Quad1 next quarter that most definitely requires pending positive confirmation from both Chinese asset markets and high-frequency economic data – neither of which is occurring at the current juncture. 

Recall that in Q2 our comparative base effects model anticipated an inflection into #Quad2 heading into the quarter, but that forecast was subsequently overturned by our nowcast model with the advent of the dour April economic data – data that slowed… 

a) against easing comps; and
b) prior to the latest ratcheting up of the US-China trade war. 


  1. Easing 2yr comparative base effects;
  2. Ongoing “fine-tuning” of fiscal and monetary policy via trending accelerations in the growth rates of SOE (+7.2% YoY in MAY) and Infrastructure Fixed Assets Investment (+4.0% YoY in MAY), General Government Expenditures (-20.9% YoY in MAY), Bank Loans (+13.4% YoY in MAY), Shadow Financing (-9.5% YoY in MAY), PBoC Open Market Operations (+30B CNY in JUN), PBoC Medium-Term Lending (-16.7% YoY in JUN), as well as a trending deceleration in banks’ Reserve Requirement Ratios (13.5% in JUL); and
  3. Ample scope for China’s private nonfinancial sector to re-lever from the perspective of the short-term credit cycle on the mainland 


  1. Steepening 3yr comparative base effects;
  2. The level of support remains muted relative to the fiscal and monetary policy impulse recorded throughout the Shanghai Accord (growth rates above shown in trailing 5yr percentile terms): SOE (20th percentile) and Infrastructure Fixed Assets Investment (7th percentile), General Government Expenditures (0th percentile), Bank Loans (53rd percentile), Shadow Financing (8th percentile), PBoC Open Market Operations (47th percentile), and PBoC Medium-Term Lending (4th percentile)
  3. An increasingly impaired monetary policy transmission mechanism that is as clogged with unreported nonperforming loans as it is short of the international capital it now needs to function smoothly 

When you take a step back and analyze the global economy in the context of the aforementioned headwinds, it’s no wonder the JPM Global Manufacturing PMI hit a new cycle-low of 49.4 in JUN – the second straight month of contraction and also the same level that China’s official PMI recorded last month. 

As of JUN, 69% of the 35 economies we’ve received Manufacturing PMI data for thus far exhibited trending deceleration basis, up from the 62% recorded in MAY

  • Accelerating Sequentially: Australia (52), Brazil (51), France (51.9), Germany (45), Philippines (51.3), South Africa (46.2), Turkey (47.9)
  • Unchanged: China (49.4)
  • Decelerating Sequentially: Austria (47.5), Czech Republic (45.9), Denmark (45), Emerging Markets (49.9), Eurozone (47.6), Greece (52.4), Hungary (54.4), India (52.1), Indonesia (50.6), Ireland (49.8), Italy (48.4), Japan (49.3), Malaysia (47.8), Mexico (49.2), Netherlands (50.7), Norway (51.9), Poland (48.4), Russia (48.6), South Korea (47.5), Spain (47.9), Sweden (52), Switzerland (47.7), Taiwan (45.5), Thailand (50.6), UK (48), US (51.7), World (49.4) 

All told, we remain in wait-and-see mode with respect to a potential Chinese economic recovery in 2H19E. While that doesn’t afford me the usual comfort I derive from generally staying three-to-six-months-ahead-of-investor-consensus on global GIP matters, I can sleep well at night knowing that I’m not advocating for our subscribers to buy global cyclicals ahead of what might manifest into a full-blown global industrial recession. 

Yes, that is the most probable outcome if China keeps slowing further from here. 

Our immediate-term Global Macro Risk Ranges are now: 

UST 10yr Yield 1.97-2.08% (bearish)
SPX 2 (bullish)
Utilities (XLU) 58.73-61.56 (bullish)
REITS (VNQ) 85.36-91.37 (bullish)
Shanghai Comp 2 (bearish)
USD 95.08-96.85 (neutral)
Oil (WTI) 51.67-61.11 (bearish)
Gold 1 (bullish)
Copper 2.64-2.74 (bearish) 

Keep your head on a swivel, 


Darius Dale
Managing Director

What If China Keeps Slowing? - Will Those 1s Stay 1s Or Become 4s In Europe And China