STIR: Repo Reference Rates

MNI (London) - China's weak domestic demand rather than U.S.-China trade tensions is the key factor for the strong rise of exports to Europe and the stagnation of imports, the European Central Bank published in its latest Economic Bulletin on Tuesday.

• China’s real estate downturn and policies promoting self-reliance under “Made in China 2025” have eroded household demand and curbed imports, particularly of consumer and intermediate goods, with weak domestic sales and falling export prices prompting firms to seek foreign markets - notably in sectors such as motor vehicles and steel, where exports have grown by about 75% since 2022, the ECB said.
• The Bulletin adds to previous reports (1, 2) suggesting China has built significant manufacturing overcapacity in recent years, indicated by domestic supply rising faster global demand, rising numbers of lossmaking industrial firms in the country, as well as declining capacity utilization, which may weigh on demand for German products.
• Back to more specific EU implications from today's study: "Weak domestic demand appears to be the missing link in explaining China’s strong exports to Europe – more so than tariff-related trade diversion. Escalating trade tensions between the United States and China might result in a further diversion of Chinese exports to Europe. However, the rise in China’s exports to the EU predates the latest tensions and coincides instead with the onset of weakness in domestic demand in China."
• In 4Q24 "the average monthly value of domestic sales was around four times higher than total exports and over 28 times larger than exports to the United States. This suggests the pool of goods that could be redirected to the EU is much broader than trade data alone would suggest. Redirecting even a small share of domestic sales abroad could boost overall exports – including to the EU – more than a sizeable diversion of exports from the United States."

J.P.Morgan now expect three more BoE rate cuts, coming in December, March, & June, which would leave the terminal rate at 3.25% (previously they looked for cuts in February & April, to a terminal rate of 3.50%).

• They note that “clearer evidence of slack helps the case for more easing, but growth resilience and sticky forward-looking pay are likely to remain a constraint on the pace and magnitude””.

Downticks in e-minis provide some cross-market support for bonds in recent trade.

• Pressure in U.S. tech names noted pre-market, with Meta (-1.3%) weaker after news that the company’s chief AI scientist is set to leave, while Nvidia (-2.0%) struggles after Softbank sold a stake in the name.
• Gilts remain the outperformer in the wake of this morning’s soft labour market data.