At the end of February, when we first reported that “The Global Credit Impulse Suddenly Collapsed To Negative“, citing UBS data on China’s credit impulse, we warned readers to ignore the sideshow that is Trumponomics, and focus entirely on monetary and credit developments out of China, especially since said developments were increasingly more concerning.
Now, over two months later, the same warning is being echoed by none other than the firm which recently regained the title of the world’s biggest active bond fund.
In the company’s blog, PIMCO’s Gene Fried echoes everything we have said and write that following the defeat of the new U. S. healthcare bill, investors have begun to rethink the likely time frame and extent of the Trump administration’s other top priorities, such as fiscal stimulus. Equity markets stalled and bonds rallied as investors toned down their expectations for global reflation recently.
None of this is horribly surprising, but by focusing so intensely on U. S. political developments, investors risk missing a silent shift in what has arguably been the strongest driver of global reflation in the last five years: Chinese credit. This driver is now moving sharply in reverse.
China’s ‘credit impulse,’ the change in the growth rate of aggregate credit to GDP, bears close watching: It has tended to lead the Chinese manufacturing Purchasing Managers’ Index (PMI) by a year (see Figure 1) and the U. S. Institute for Supply Management’s (ISM) manufacturing index by 14 months.
This post was published at Zero Hedge on May 3, 2017.