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Analysts at Standard Chartered says that China’s growth fell short of market expectations in May as industrial production growth decelerated to 5% y/y from 5.4% in April, compared to market forecast of 5.4%.

• “The longer May Day holidays weighed on production activity but boosted retail sales growth to 6.4% y/y in May in real terms from 5.1% previously. Fixed asset investment (FAI) growth moderated to 2.7% y/y in May in real terms, from 4% in April, due to slower growth in infrastructure and land investment. The labour market remains stable, with the surveyed unemployment rate unchanged at 5% in May.
• While growth has underwhelmed in the first two months of Q2, it could pick up strongly in June as China tends to post slow growth at the beginning of a quarter and stronger growth in its final month. In other words, overall GDP growth may not have changed much from 6.4% y/y in Q1.
• Nevertheless, uncertainty is rising due to the renewed trade conflict between the US and China. We estimate that 25% tariffs on all US imports from China could deduct 1.2ppt from China’s annual GDP growth.
• We believe China can still achieve its GDP growth target of 6-6.5% for 2019. The proactive fiscal policy approved for 2019 should offset much of the negative impact of higher US tariffs.
• We forecast additional cuts of 100bps to the reserve requirement ratio (RRR) or an equivalent amount of liquidity injection via targeted RRR cuts, medium-term lending facility (MLF) or targeted MLF in the rest of 2019. The PBoC is also likely to lower the MLF or the open-market-operation (OMO) rates.”

The Commerce Department reported on Friday that business inventories rose 0.5 percent m-o-m in April, following an unrevised flat m-o-m performance in March.

That was in line with economists’ forecast.

According to the report, inventories at wholesalers surged by0.8 percent m-o-m in April, while stocks at retailers and manufacturers rose by a respective 0.5 percent m-o-m and 0.3 percent m-o-m.

Retail inventories excluding autos, which go into the calculation of GDP, increased 0.4 percent m-o-m, after being flat m-o-m in the prior month.

A report from the University of Michigan revealed on Friday the preliminary reading for the Reuters/Michigan index of consumer sentiment fell to 97.9 in early June.

Economists had expected the index would decrease to 98.0 this month from May’s final reading of 100

In early June, consumer sentiment reversed the May gain due to tariffs as well as slowing gains in employment, the report said. Some of the decline was due to expected tariffs on Mexican imports, which may be reversed in late June, but most of the concern was with the 25% tariffs on nearly half of all Chinese imports. Consumers responded by lowering growth prospects for the national economy, and as a consequence, reduced the expected gains in employment.

According to the report, the index of current U.S. economic conditions rose to 112.5 in June from 110.0 in the previous month. Meanwhile, the index of consumer expectations fell to 88.6 this month from 93.5 in March.

James Knightley, the Chief International Economist at ING, notes that a rebound in utility output has helped lift U.S. industrial production while manufacturing output has risen for the first time in five months thanks to car production.

• "US industrial production rose 0.4% month on month in May, beating the market prediction of 0.2% thanks primarily to a 2.1% bounce in utility output. Mining rose just 0.1%MoM while manufacturing posted a 0.2%MoM gain – the first rise since December. Within manufacturing, vehicle production led the way, rising 2.4%. Strip this component out and manufacturing would have been flat on the month.
• While it is better than predicted, the US-China trade uncertainty is clearly weighing on the sector. These tensions and the worries about what protectionism might mean for company supply chains, costs and profitability run the risk that manufacturing firms sit on their hands and stop investing and hiring new workers. Moreover, we have to remember that manufacturing still hasn’t recovered all the output lost through the recession - output remains 4.6% below the peak level in 2007.
• We see little prospect of trade tensions easing in the near-term, so the headwinds for manufacturing will continue. The Federal Reserve looks set to embark on some precautionary policy stimulus by cutting interest rates which will help the sector.
• But with weakness here being more than offset by the fact consumers are still willing to spend, we suggest 50bp of rate cuts is more likely this year than the 100bp currently priced by markets."

The Federal Reserve reported on Friday that the U.S. industrial production jumped 0.4 percent m-o-m in May, following a revised 0.4 percent m-o-m decrease in April (originally a 0.5 percent m-o-m drop). That was the biggest gain in industrial production since November 2018.

Economists had forecast industrial production would increase 0.2 percent m-o-m in May.

According to the report, the index for utilities climbed 2.1 percent m-o-m in May, while the indexes for manufacturing and mining gained 0.2 percent m-o-m and 0.1 percent m-o-m, respectively.

Capacity utilization for the industrial sector increased 0.2 percentage point m-o-m in May to 78.1 percent. That was 0.1 percentage point above economists’ forecast but 1.7 percentage points below its long-run (1972–2018) average.

In y-o-y terms, the industrial output rose 2.0 percent in May, following an unrevised 0.9 percent advance in the prior month. 

U.S. stock-index futures fell on Friday, as investor sentiment was weighed down by a drop in semiconductor shares alongside weak data out of China.

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