Chinese property prices rose for a second straight month in March, up 0.44% m/m in the primary market, and 0.26% m/m in the secondary market. This is not a reason to be long-term bullish on China: US-China tensions are ratcheting up. But if a strong cyclical recovery in China takes hold, it will quickly change the narrative that currently prevails in markets, and shift expectations (to price out Fed rate cuts for the year). The CAC 40 has jumped 16.2% YTD to a record high, outperforming the Stoxx 600 and the S&P 500, as investors pile into luxury goods makers, betting on a return of the Chinese consumer. The Shanghai Composite Index has also broken out.
At full employment, the US should be running a primary surplus. Instead, the 12-month moving total for the federal budget deficit widened to $1.808tr in the twelve months to March. There is very little control over government spending: outlays rose 9.2% y/y (12-month moving average). Both the US and Chinese budget deficits are projected to exceed 6% of GDP every year between now and 2028. The term premium on US government debt remains far too low.
The Fed is arguably making good progress in its battle against inflation. But this does not mean rates will be cut. The US is quickly headed for $2tr deficits. Such an expansionary fiscal policy requires higher real rates of interest. Growth is being supported too by the passage of the IRA and CHIPS acts: combined manufacturing investment announcements have totalled $213bn so far.
