China’s Resilient Q1 GDP Performance Amidst March’s Growth Moderation

Overnight, the dollar index soared to a new peak for the year, hitting 106.39. This surge follows the release of an unexpectedly strong US retail sales report for March, with control retail sales jumping by an impressive 1.1% month-on-month, marking the most significant monthly increase since January 2023. Moreover, upward revisions to retail sales growth in January and February suggest a less pronounced slowdown in consumer spending for Q1 than initially anticipated, with annualized growth surpassing 3.0% in the latter part of last year.

The strong growth momentum seen in the US at the beginning of the year has put upward pressure on US rates and the dollar alike. The 10-year US Treasury yield surged to a fresh year-to-date high of 4.66%, marking an 88-basis-point increase since the year-end low.

Market observers are eagerly awaiting insights from Federal Reserve officials, particularly Fed Chair Powell, regarding adjustments to monetary policy considering recent data indicating robust US activity and inflation. While New York Fed President Williams downplays recent inflation figures as not marking a “turning point,” he acknowledges their influence on policy outlook and forecasts. Williams maintains the view that the Fed may start cutting rates this year if inflation gradually eases. Additionally, concerns about escalating tensions between Israel and Iran linger, though the initial market reaction remains subdued. While being closely monitored by Fed officials, the situation has yet to significantly impact the US economic outlook.

Geopolitical uncertainties and the potential for a global energy price shock further highlight the relative attractiveness of the US dollar in the near term. With geopolitical tensions simmering and energy markets on edge, investors continue to gravitate towards the stability of the US currency, fuelling its ongoing strength.

Shifting focus to the Asian market, Q1 GDP figures from China surpassed market expectations by a significant margin, with headline growth reaching 5.3% year-on-year, surpassing the consensus of 4.8% and the previous quarter’s 5.2%. On a quarter-on-quarter seasonally adjusted annualized rate basis, the rebound was even more pronounced, surging to nearly a four-year high of 12.7% in Q1 from 3.2% in Q4 2023.

The robust performance in Q1 GDP largely stems from stronger January-February data, particularly in industrial production and exports. However, March’s data presents a different picture, with activity, trade, credit, and prices showing signs of weakening, indicating a slowdown in growth momentum during the past month.

Notably, while real GDP growth stood at 5.3%, China’s nominal GDP growth only reached 4.2% year-on-year in Q1, suggesting a negative GDP deflator of -1.1%.

In March alone, retail sales growth missed expectations for the fifth consecutive month, registering 3.1% year-on-year compared to a Bloomberg consensus of 4.8%, down from 5.5% in January-February. Industrial production growth also disappointed, moderating to 4.5% in March following a temporary surge to 7% in January-February.

Moreover, the contraction in property investment intensified to -10% year-on-year in March from -9.0% in the first two months of the year, while infrastructure investment softened to 8.6% year-on-year from 9.0% in January-February. Conversely, manufacturing investment accelerated to 10.3% year-on-year in March from 9.4% in the preceding two months.

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