FED: St Louis's Musalem Explains Benefit Of Paying Interest On Reserves

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Chinese trade data for May was not suggestive of increased trade diversion away from the US and into the Euro area – a disinflationary risk that markets and some ECB Governing Council members have expressed concerns about in recent months. Instead, there appears to be more evidence that China is simply channelling exports to the US through other trading partners, such as Vietnam and other ASEAN nations.

• Chinese trade data is released with much less of a lag than the Euro area. Yesterday’s data for May was released before Eurostat publishes April goods trade data (due on June 13)!
• The headline figure coming out of the release was a 34% Y/Y fall in US exports. On a 3mma Y/Y basis, US exports were down 16%. That compares to a 12% increase for the EU, a 21% rise for Vietnam and a 16% increase for the broader ASEAN group.
• While above last year’s levels, Chinese exports to the EU are not obviously diverging from recent seasonal norms - in contrast to the US.
• Meanwhile, Chinese exports to Vietnam are instead operating above recent norms. This is happening in conjunction with a widening in Vietnam’s trade surplus with the US. Movements in Vietnam’s surplus with the five largest Eurozone nations have been more much muted.
• In its latest projection round, the ECB did not incorporate the disinflationary threat of Chinese trade diversion into its scenario analysis. However, it did note that “these dynamics could potentially amplify the downward pressures on inflation in the euro area in the severe scenario”.
• On the other hand, Executive Board member hawk Schnabel noted in subsequent comments that she “would argue that this effect is actually quantitatively quite small”.
• In a similar vein, JP Morgan recently wrote that “China deflation through April has been a modest drag for Euro area consumer price inflation”, and that their “analysis suggests that this drag is likely to remain modest”. They estimate “a 0.1%-pt drag on inflation over the coming two years based on the current level of the currency”.