As we first previewed last week...
China cutting, US hiking: 10Y yield crossover will take place in the next few days pic.twitter.com/0gCuXxnzyK— zerohedge (@zerohedge) April 7, 2022
... and as noted earlier today, this morning we got the first US-China 10Y yield "inversion" since 2010, as Chinese 10Y treasuries briefly yielded less than their US peers, a shift which we hadn't seen since 2010, yet one which in light of the continued Chinese easing and US tightening, was only a matter of time.
However, judging by the sharp slowdown in China's economy - the latest CPI and PPI data notwithstanding - Chinese yields have a long way lower to go to as does PBOC easing.
As Bloomberg writes this morning, China’s Covid-policy continues to bite, and as the following charts from Goldman show, the continued surge in Shanghai covid cases means China's financial center is starting to hurt the broader economy.
To be sure, growth fears will put further pressure on local equities - and indeed Chinese stocks stumbled on the first day of the week - pending a more aggressive policy response. China’s CSI 300 was among Asia's worst-performing indexes as Shanghai reported more than 26,000 daily infections Sunday and official data showed that factory-gate and consumer prices both jumped more than expected last month. China’s tech shares took an additional hit from the country’s new guidelines on removing data monopoly at platform companies, dragging the Hong Kong equity gauge.
China’s effective lockdown index, published by Goldman Sachs, remains at the highs since April 2020. At an average of 36.6 for the first week of April 2022, the index has sustained the end-March levels that have put the dire August 2021 period in the shade (22.0 for that month’s average). The August numbers were associated with large downside surprises in activity data. This is especially damaging to local demand. Tourism revenue over the Qingming festival, the three-day national holiday last week, plunged to only 39% of pre-pandemic levels. Data Monday showed a 10.9% y/y slide in vehicle sales in March.
To be sure, China has a good record of keeping production running despite its draconian Covid-control policies, and supply-side disruptions have been surprisingly mild.
That said, according to China television, the country's outgoing Premier Li Keqiang told some local officials that China will study and adopt stronger economic policies as needed. And needed they are, because according to Li, downward pressure on the economy is increasing and is in part from international and domestic changes that are beyond expectations.
Li urged stabilizing employment, consumer prices and keeping the economy in reasonable range; the premier also said that China must stabilize the economy via better implementation of existing macroeconomic policy. Li also urged local officials to accelerate release of coal capacity, ensure transportation and port operations.
One place which will be keeping a close eye on China’s policy response is Europe: according to the European Union Chamber of Commerce in China, the country's Covid lockdowns have caused “significant disruptions” for many companies and Beijing should look to Singapore as a model to spur economic growth.
A flash survey of German companies showed that China’s Covid Zero strategy has consequences “extending from logistics and production all the way along the entire supply chain within China,” Joerg Wuttke, the president of the chamber, wrote in a letter to Vice Premier Hu Chunhua.
51% of German companies’ logistics and warehousing and 46% of their supply chains are “completely disrupted or severely impacted” by China’s Covid situation, Wuttke wrote in the letter, which was seen by Bloomberg News and confirmed by the Chamber.
The trade group suggested China follow Singapore’s strategy to “simultaneously prioritize protection for all its citizens and economic growth,” including allowing positive cases with no or mild symptoms to quarantine at home, focusing on fully vaccinating the population, and using boosters including mRNA vaccines.