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FirstFT: Lockdowns cloud outlook on China’s economic growth

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Good morning. This article is an on-site version of our FirstFT newsletter. Sign up to our Asia, Europe/Africa or Americas edition to get it sent straight to your inbox every weekday morning

China’s economy grew faster than expected in the first quarter but official data revealed a contraction in consumer activity as lockdown measures to counter the spread of Covid-19 weighed on the country’s outlook.

China’s gross domestic product rose 4.8 per cent compared with the same period a year earlier, after expanding 4 per cent in the final three months of 2021. On a quarter-on-quarter basis, GDP grew 1.3 per cent.

Retail sales, a gauge of consumer spending, fell 3.5 per cent in March — its first contraction since July 2020 — as authorities hardened restrictions to counter the country’s worst coronavirus outbreak in more than two years.

The data will add to pressure on the government of Chinese president Xi Jinping, which has reaffirmed its commitment to a zero-Covid policy despite mounting costs and disruptions in the biggest cities. Infections across China rose in April and Shanghai, its main financial hub, has remained largely sealed off.

  • The lockdown effect: The lockdown in Shanghai began in late March, meaning its full impact will not be recorded in the first quarter report, which did take into account less severe lockdowns in the manufacturing hubs Shenzhen and Jilin.

  • Wealthy seek to leave: Chinese immigration consultants say inquiries from wealthy individuals trying to leave have surged following the lockdown of Shanghai, underscoring frustration with Beijing’s zero-Covid strategy.

Line chart of Index of the historical strength of a composite range of indicators showing Covid recovery momentum was falling even before Russia invaded Ukraine

What do you think of Beijing’s zero-Covid strategy? Share your thoughts with me at firstft@ft.com. Thanks for reading FirstFT Asia. — Emily

The latest from the war in Ukraine

1. Gold rises to highest level in a month Gold prices climbed and US stocks slipped on Monday as worries over a weakening global economy were heightened by signs that coronavirus lockdowns had clouded the outlook for growth in China.

Line chart of $ per troy ounce showing Gold shines on economic uncertainty and inflation concerns

2. Whisky on the table as Johnson heads to New Delhi Leading Scotch maker Chivas Brothers says it aims to double exports to India if New Delhi eliminates whisky tariffs, a top UK demand in bilateral trade talks ahead of prime minister Boris Johnson’s visit to India this week.

3. Sri Lanka’s president appoints new leaders President Gotabaya Rajapaksa appointed 17 cabinet members yesterday as protests over alleged economic mismanagement continue to roil the nation. Rajapaska chose younger leaders to appease the public, but his 76-year-old brother, Mahinda Rajapaksa, will remain prime minister. (Straits Times)

4. Marine Le Pen rejects reports of EU funds misuse French far-right presidential challenger Marine Le Pen has dismissed allegations that she misappropriated tens of thousands of EU funds as “dirty tricks”, less than a week away from a tight election race against Emmanuel Macron.

5. UK braced for prolonged period of stagflation The risk of a prolonged period of low growth in gross domestic product coupled to high inflation in the UK has increased after consumer prices surged more than expected while economic growth slowed to a crawl.

Coronavirus digest

  • A US judge has halted the Biden administration’s mask requirement for public transport passengers.

  • China’s zero-Covid policy has taught the world that it is no longer possible, if it ever was, to combat the virus with suppression alone. Ways to live with the virus must be found, our editorial board writes.

  • The number of births in advanced economies has largely rebounded to pre-pandemic levels, an FT analysis shows — a recovery partly due to stimulus policies.

Slope chart showing Share of women who say they have not had sex in the last 12 months G0136_22X

The day ahead

Indonesia central bank meeting Policymakers at Bank Indonesia will meet and make their interest rate decision.

Johnson faces UK parliament A defiant Boris Johnson will face MPs for the first time since being fined over the “partygate” affair, with allies privately criticising the Metropolitan Police’s handling of the issue. The UK prime minister will apologise to MPs but will insist that he was not aware he was breaking his own Covid-19 lockdown rules.

IMF World Economic Outlook With inflation hitting a fresh 40-year high in the US and a 30-year high in the UK this week, the IMF said its forecasts set to be released today would also show rapid price increases would be more persistent than it previously thought.

Join us for the FT’s Crypto and Digital Assets summit on April 26-27. Register today to be part of a critical conversation with the world’s global financial and corporate elite, as they carve out the path ahead for bridging traditional finance and the crypto leaders of tomorrow.

What else we’re reading

US-China Tech Race: Shock and Awe In the latest episode of this Tech Tonic season about US-China tech rivalry, the FT’s US-China correspondent Demetri Sevastopulo tells the inside story of his scoop on China’s secret hypersonic weapon test and how it changed geopolitics.

Asian Americans take safety into their own hands after violent attacks Since the pandemic, anti-Asian hate in the US has escalated. Amanda Chu speaks to Asian Americans in New York City, where the police department estimates that hate crimes against them jumped more than 360 per cent in 2021.

OK, boomer: generations aren’t real. Class is. Desperate individuals — like marketing professionals or opinion columnists who have passed their deadline — love to talk about “generations” because they are neat ways to sell someone something they might not otherwise buy, writes Stephen Bush. For more from Stephen, sign up here for our latest newsletter, Inside Politics.

India’s biggest-ever merger The proposed $40bn merger between India’s biggest private sector bank and mortgage provider has been driven by tighter regulation of the country’s shadow banking sector, Deepak Parekh, chair of HDFC Bank and Housing Development Financing Corporation, told the FT.

Donald Trump and the Republicans’ midterm dilemma The Republican Senate primary in Pennsylvania next month is becoming a pivotal event in this year’s midterm elections and could determine which party controls the upper chamber of Congress. US president Joe Biden defeated Donald Trump in 2020 in the state, but only by a razor-thin margin.

Fashion

Hard luxury drives the retail market because watches and jewellery tend to retain, or even increase, their value. Historically, clothing has been a poor investment, losing about 90 per cent of its value at the point of purchase. But a boom in online retail and changing attitudes towards pre-owned have given rise to vast online marketplaces for second-hand goods.

Copenhagen-based Ganni is the latest brand to launch a resale marketplace © Sarah Stenfeldt

Working It — Discover what’s shaking up the world of work with Work & Careers editor Isabel Berwick. Sign up here

Disrupted Times — Your essential FT newsletter about the changes in business and the economy between Covid and conflict. Sign up here

Thank you for reading and remember you can add FirstFT to myFT. You can also elect to receive a FirstFT push notification every morning on the app. Send your recommendations and feedback to firstft@ft.com. Sign up here



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Economy

The recession session II | Financial Times

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An internal staff memo from the desk of Greg Peters, co-chief investment officer of the $890bn asset manager PGIM Fixed Income, reaches our inbox. It makes some timely points so we’re sharing the highlights.

Peters has been around the block and knows his stuff. Despite being known internally for somewhat jazzy jackets, he has helped manage some of PGIM’s biggest strategies since joining in 2014 and before that led Morgan Stanley’s fixed income research.

It’s fair to say that his mood doesn’t currently match the brightness of his blazers. Here’s the main message of the memo, with our emphasis.

I want to take this moment to plainly and clearly reiterate my thoughts on the market and risk opportunities. I continue to assert and thus wish to restate that I believe it is entirely too early to dip your toe into the risk waters. The simple fact is that valuations are decidedly average and the tightening into a recession game hasn’t even yet begun in earnest. The persistent inflation backdrop increases my confidence in a central bank induced recession. Frankly, I don’t see another way out.

There’s some rubbernecking around crypto “getting smoked” and how it could escalate into a “full fledged meltdown” for the space, as well as a prediction that sterling is going to nosedive because “the unsteady BOE, fraught politics and Brexit are rearing their individual and collective ugly heads”.

But the central message of Peters’ memo is on his view that central banks globally are willing to sacrifice economic growth to combat inflationary pressures. And even setting aside how fiercely (or not) central banks will react to inflation, the economic impact of price rises is starting to become a major worry.

Walmart’s woeful results on Tuesday provided one of the strongest hints yet that some companies are struggling to pass cost pressures on to consumers. That raises broader worries about both corporate profit margins and the health of American spenders — two pretty important pillars of financial market returns in recent years.

Walmart’s share puke — now down 18 per cent over the past two sessions — has naturally hogged headlines. But on Wednesday, Target also warned that rising costs were eating into profits, hammering home that this is potentially a broader problem. The news sent its shares down nearly 25 per cent, while US consumer staples stocks, supposedly one of the steadiest, most defensive corners of markets, went down a whopping 6.4 per cent.

That dragged the S&P 500 down another 4 per cent on Wednesday to take its decline to 17.7 per cent this year. The Nasdaq slumped over 5 per cent to extend its 2022 loss to almost 27 per cent.

The breadth of the sell-off reeks of recession fear, triggered by consumer-hurting inflation. This has morphed from a spec-tech wreck, to a broad tech rout, and now to an unnervingly broad market decline.

Here’s more from Peters’ memo, with FTAV’s emphasis:

In my mind, CBs have worked too hard for too long to gain inflation fighter status that they are not going to casually throw away that hard earned credibility currency. I continue to look at the early 1980s as a guide where the Fed cranked up interest rates by 10% percentage points; killed the economy which prompted inflation to fall, which in turn allowed for a multiple decade backdrop of low inflation and a reasonably prosperous economy. Perhaps, the Fed wont hit it as hard as the early 1980s given the different secular factors that they face in the years and decade ahead — but they are still going to pump the economic brakes enough to turn growth negative. In my simple mind, it is an inevitable outcome and nothing more than the uncomfortable math of monetary policy.  

So yes, I have a very high probability of a recession over the next 12-24 months.

However, Peters reckons implications for markets is a bit more complex. Stocks have sold off and corporate bond spreads widened significantly, making valuations a bit less wild. But Peters still doesn’t think they are nearly compelling enough yet to start dip-buying, given the risks of recessions.

 I am very sure that if the economy hits a recession, spreads will widen. Actually, that recession/spread relationship might be the only universal truth that I can accept as true. Consequently, given that we are only at the average in spreads AND I think recession risk is elevated, I don’t see a rational argument to add nonsystematic spread risk to the portfolios.

. . . The next months and quarters are highly likely to be volatile with violent moves in spreads both wider and tighter. Unless spreads blow out quickly over the near term, I would look to use the volatility to reduce risk in spread tightening (and thus better liquidity conditions) and not buy the dip. Buy the dip is a failed formula with CBs fighting inflation as a backdrop.

Only one thing would make Peters change his mind, and that is a clear sign that inflation has peaked, which would encourage central banks to back off.

This would reduce the risk of a policy mistake and/or a CB led recession. I know this sounds overly simplistic, but inflation is what matters most and driving central banks, politics and consumer psyche. All said, I believe that duration and interest rates are going to be a much cleaner play around this central bank inflation fighting into a recession narrative. At some point, although not yet as I still see another 25bp or so in 10yr yields, the rate market is going to be the first to react as I expect to see duration rally (both front-end and the belly) well before spreads. You got a preview sense of that yesterday, and past few days, but I don’t think it will hold with the Fed continuing to move thus continuing to unhinge the belly.

That said, FTAV recalls Paul Samuelson’s old 1966 quip that the stock market had predicted nine of the past five recessions. Is this just another classic markets freakout that will pass?



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Sri Lanka becomes first Asia-Pacific country in decades to default on foreign debt

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Sri Lanka’s central bank has confirmed the country has missed a deadline for foreign debt repayments, the first sovereign default in the Asia-Pacific region this century, according to Moody’s.

A 30-day grace period for missed interest payments on two international sovereign bonds expired on Wednesday, forcing Sri Lanka into what some analysts called a “hard” default as Colombo confronts an economic and political crisis. The last Moody’s-rated sovereign borrower to default in Asia was Pakistan in 1999.

President Gotabaya Rajapaksa’s government said last month that Sri Lanka would stop repaying its international debt to conserve foreign currency reserves for imports such as fuel, medicine and food.

Sri Lanka, which has never defaulted before, owes about $51bn in overseas debt to international bondholders as well as bilateral creditors including China, Japan and India.

At a briefing on Thursday, Nandalal Weerasinghe, the central bank governor, confirmed that Sri Lanka’s creditors could now consider the country technically in default.

“We announced to the creditors, we said we are not in question to pay that. If you even don’t pay after 30 days . . . then probably from their side they can consider it as a default,” he said. “Our positions are clear. We say until they come to restructure we will not be able to pay.”

But the central bank disputed that it was a hard default, calling the move “pre-emptive”.

S&P last month downgraded Sri Lanka’s foreign currency ratings to “selective default” on the missed interest payments.

Analysts said that rising global interest rates, high energy prices and a surge in inflation was piling pressure on import-dependent developing economies such as Sri Lanka.

The island borrowed heavily to fund infrastructure-led growth after the end of its civil war in 2009, but policies including a 2019 tax cut and the loss of tourism during the pandemic left it unable to refinance in international debt markets.

The crisis has triggered widespread pain for Sri Lanka’s population, with a scarcity of fuel leading to long queues for petrol and multi-hour power cuts. The currency has also plunged, exacerbating political unrest.

The cabinet, including Gotabaya’s brother Mahinda, the prime minister, resigned last week as attacks by pro-government supporters against a growing protest movement triggered a wave of violence across the island.

Ranil Wickremesinghe, the newly appointed prime minister, said this week that the Treasury was struggling to find $1mn to pay for imports.

Sri Lanka has begun negotiations with the IMF over a loan programme and is appointing advisers for debt restructuring talks with its creditors. But it lacks a fully functioning government, including a finance minister, and analysts expect any deal to take months.

The missed payments, for interest on two $1.25bn international sovereign bonds maturing in 2023 and 2028, could trigger cross-default clauses that would bring much of Sri Lanka’s debt due before it has begun formal restructuring talks.

A Sri Lankan government bond maturing in July this year is trading at about 45 cents to the dollar, with longer-dated bonds at even lower values.

JPMorgan on Wednesday assigned an overweight rating to Sri Lanka bonds, indicating that it expected bond prices to rise in the coming months.

“Twists and turns are likely to materialise in the months ahead,” JPMorgan wrote. “However . . . we think risk-reward is favourable to start building long positions.”

Additional reporting by Hudson Lockett



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US companies boost capital spending to tackle supply bottlenecks

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US companies are accelerating capital spending despite slower economic growth, as the impact of supply chain disruptions and “deglobalisation” override worries about a looming recession.

A wave of recent disruptions, from coronavirus lockdowns to Russia’s invasion of Ukraine and tensions between the US and China, have led many high-profile investors and executives to predict a reversal of the decades-long trend toward sprawling global supply chains and “just in time” inventory management.

Recent quarterly reports from the largest US companies provide some of the first concrete signs that companies are following through on their plans, putting pressure on their profitability just as the economic recovery begins to lose steam.

With the majority of companies in the S&P 500 index having reported first-quarter results, capital expenditure across its members rose 20 per cent year on year in the first quarter, according to Bank of America data. The proportion of companies providing guidance for higher future spending than analysts had expected also rose. The trend was broad-based, with every sector except real estate increasing spending.

“Onshoring or rejigging supply chain risks — that’s a costly phenomenon,” said Savita Subramanian, head of US equity and quantitative strategy at Bank of America. “Capex is usually something companies can move around or relax a bit in a constrained environment, but in this case they may have to spend more than they otherwise might.”

The US economy unexpectedly contracted in the first quarter, and investors and commentators such as former Goldman Sachs chief Lloyd Blankfein have become increasingly convinced that the Federal Reserve’s efforts to fight inflation will push the economy into recession.

The rising business investment is becoming a burden for some consumer-facing companies, but is also proving a boon for many of their suppliers and infrastructure providers.

Shares in Walmart sank 11 per cent on Tuesday after a disappointing quarterly update that included a 60 per cent rise in capital expenditure to increase automation and strengthen its supply chain through projects such as massive high-tech distribution centres.

Intel’s pledge to build a $20bn chip manufacturing site in Ohio, meanwhile, sparked celebrations from steelmakers, chemical specialists and plumbing suppliers such as FTSE 100 company Ferguson.

Lourenco Goncalves, chief executive of Cleveland-Cliffs, a major steel supplier to the automobile industry, said “deglobalisation is the most important game changer of this decade in the United States”, and he was “encouraged” by Intel’s plans because a better domestic supply of semiconductors would allow carmakers to boost production.

Kevin Murphy, CEO of Ferguson, in March described plans to increase US semiconductor production including Intel’s Ohio project as some of the most “exciting” examples of a broader trend toward onshoring manufacturing production.

Brookfield Infrastructure Partners, one of the world’s largest investors in infrastructure from electricity lines to data centres, estimated that “re-onshoring activity and deglobalisation” would provide “hundreds of billions of dollars” of new investment opportunities.



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