Weekly Global Fixed Income Investment Strategy : Still Cautious on a Long-end Tenor Yield

Yesterday, in weekend, Chinese government released industrial production and retail sales data, on a yearly growth rate, in August. As consequences, I.P. was weaker than expected, while retail sales was resilient. As a part of this, some Asian equity markets, such as SHCOMP, Nikkei225, and Kospi were down today despite it was not critical movement.

But, the plunged industrial production growth signal the whole economy slowdown in China?
As China is one of the biggest exporters for the world, the industrial production could be influenced by global demand mainly, not Chinese domestic economy. For following Chinese own economy, likewise we usually consider imports data in another post, we should check retail sales rather than industrial production.

In fact, Chinese economy is on a slowdown to be set and adjusted in new normal growth. This is what we all know. Given this, we could see the higher retail sales growth than industrial production since mid 2000s. As we saw in a history about Chinese capital control, Chinese government started to reform economic model to boost domestic consumption as permit strengthening Renminbi since mid 2000s, and the growth of retail sales have maintained higher level than industrial output. On the other hand, since late 1990s, industrial output growth had been higher than retail sales, when China decided to adopt export-led economic model.

Chinese retail sales growth is relatively high over 10% yearly. So, I think current woes about Chinese economic slowdown or crisis are overstated.

In a contrast of lowering target of oil price posted previously, Goldman Sachs published global fixed income market report arguing upside potential for long-end tenor yield as current pricing inflation is too low against expected rate. This is absolutely equal to my view.

They suggest recent yield drop since June this year has been caused mainly by lowering inflation expectation with a below chart.

Actually, we could confirm this as a comparison of US treasury 10 year bond yield and WTI price with a below chart.

As they noted, the oil price impact on CPI should be shrunk from 4th quarter this year, albeit Goldman Sachs predicts further fall in oil price. If then, long-end tenor could be pushed higher, especially in line with the start of Fed funds rate hike in the end of this year. This is not by growth factor yet, but by the inflation rate from a year earlier.

So, I maintain my position announced last strategy.