Surprisingly good trade data drove Chinese shares higher today, on a mixed and modest day's trade in Asia. It's the calm amidst the storm as we wait to see what the Fed is going to do.
The central banks of Asia's largest two economies are also meeting this week. But it is Washington that Asia-based investors will be watching.
China's central bank left its medium-term policy rate unchanged on Wednesday, the fifth straight month it has done so. The Bank of Japan will meet on Thursday and Friday, but it too is unlikely to change its accommodative stance.
They have little reason to rush. Inflation is tame in China, steady at 2.1% in May, the same as the prior month. In Japan, core consumer prices rose 1.9% for Tokyo in May, meaning the country may finally sustain the central bank's 2% inflation target.
In China, the May activity data released Wednesday by the National Bureau of Statistics showed that the economy did derive some benefit from the lifting of lockdowns in late May. June should see further improvement after Shanghai ended its two-month confinement and Beijing began to lift most restrictions.
Chinese industrial production rose 0.7%, having fallen 2.9% in April. Economists polled by Reuters had anticipated a 0.7% decline. The stats bureau said the economy "showed a momentum of recovery."
Retail sales still went backwards, falling 6.7% compared with May last year, but that was an improvement from the double-digit 11.1% decline in April.
Economists are not convinced. Despite the positive official numbers, private research paints an uglier picture. As a result, "we believe some fundamentals might be worse than the official data suggest," Nomura's chief China economist, Ting Lu, and his team say in a note to clients. The road-freight index fell 18.7% in May, while new-home sales plummeted 31.8%. The output numbers for electricity, cement, cars, steel and smartphones are all still falling.
China's zero-Covid strategy also leaves it vulnerable to renewed outbreaks, and renewed lockdowns. Most of Shanghai was told to stay home and tested for Covid on Saturday.
In Beijing, the authorities have once again closed all bars, karaoke lounges and other entertainment venues after tracing 287 cases on Tuesday afternoon to the Heaven Supermarket Bar in trendy Sanlitun. The license of the bar has been revoked and the owner is being prosecuted on suspicion of failing to require negative Covid tests within the last three days from customers.
A spokesman for the Beijing city government said it is a "race against time" to contain the outbreak. Already, 10,000 close contacts of bar customers have been traced, with their residential buildings locked down. That's huge! The city's biggest district, Chaoyang, has been testing its entire 3.5 million population between Monday and Wednesday.
Beijing has pushed back its planned reopening of schools indefinitely, too. Students did not return to the classroom on Monday as initially intended. Many shopping centers, gyms and other venues, as well as parts of the public transport system, are closed. Beijing has resisted a blanket lockdown but nevertheless locked down large parts of the city at a time.
The threat of further restrictions could halt the positive momentum that the Chinese economy has begun to show. China today reported 235 new Covid cases established in the previous 24 hours. Having fallen in late May, the case count has begun to rise again, although remains at a fraction of the 25,000 or so daily infections at the height of Shanghai's outbreak in April.
Nomura says the threat of lockdowns has produced a new economic phenomenon in China: the "Covid business cycle." It's like a longer-term economic cycle in its upswings and downswings, but sharper, and less predictable.
"A downswing is triggered by a surge in new Covid cases, travel bans, lockdowns, closures of factories and shops, and disruptions to supply chains. The economy falters as a result," Lu at Nomura states. Cities shut down, lock their populations in place, and bring about a decline in infections. The government then shows largesse to stimulate the economy to avoid a deep recession. The economy bottoms out.
But the cycle isn't over. Renewed cases - the stage we are in now in China - cause a rethink, and the threat that the economy can shift back into reverse.
"As mobility recovers and people drop their guard, new cases could suddenly surge again, and the government then rushes to re-impose lockdowns, sending the economy back to contraction again," Lu notes. "The duration and severity of CBCs appear quite random due to the uncertain nature of Covid-19."
China is still clinging to a target of growth of "around 5.5%" for this year. But economists give it scant chance of hitting that. Q2 will be touch and go as to whether the Chinese economy grew or shrank, and most forecasters anticipate the GDP will expand around 3.3%, with risks to the downside.
The positive trade numbers drove Chinese shares higher on Wednesday. The CSI 300 of the largest mainland companies rose 1.3%, while the Hang Seng Index in Hong Kong climbed 1.1%.
Japanese stocks fell by a similar margin, with the Topix down 1.2%. Australian shares fell 1.3%, and most other Asian markets nudged into the red as we wait for the U.S. Federal Reserve Bank's meeting to conclude.
The savage declines in U.S. stocks, and indeed world markets, earlier this week stem from a shift in perception that the Fed is likely to raise interest rates by 75 basis points, rather than 50, at both its June and July meetings.