It's not what a default means for China. Rather it's what happened to China to cause a default.
Start with this chart. Economists are hacking China growth forecasts, and the downgrades are accelerating.
1/5
These downgrades are consistent with the Economic Strength Indices (ESI) compiled by our colleagues at @DataArbor . They measure incoming economic data versus its 1-year average.
China’s ESI has been falling and recently turned negative.
2/5
Currently, China (orange) is the only large economy with an ESI below zero.
3/5
BB Credit Impulse Index.
It measures the change in household and non-fin liabilities (credit) divided by GDP. The Chinese economy is deleveraging, so it should come as no surprise that China’s largest (leveraged) property co, Evergrande (and junk credit), is in trouble.
4/5
The Chinese economy is hitting the skids hard. Their most vulnerable companies are in trouble and the government is cracking down on the private sector. The People’s Bank of China is injecting huge sums of liquidity into the economy, its most since January.
5/5
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ISM was released this morning, marking the first monthly data point since Liberation Day.
It beat expectations and is not giving indications that manufacturers "froze" or "hit a wall" post Liberation Day.
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*US APRIL ISM MANUFACTURING INDEX FALLS TO 48.7; EST. 47.9
2/9
It is consistent with decent NON-TARIFF growth.
3/9
Why did bonds not like it (yields moved higher)? Maybe prices paid (tariffs?)
Yesterday, I made the case that tariff-driven inflation expectations are soaring, driving the bond market, and paralyzing the Fed from cutting despite fears of a recession.
Last week, the 30-year yield rose 46 basis points last week to end at 4.87%.
As this chart shows, this was its biggest weekly rise since April 1987 (38 years ago!).
2/16
Why Did This Happen?
Let's start with what it was not. It was not data that suggested the economy was strong or recent inflation was high.
Here is a tick chart of the last 3-days of the 10-year yield.
3/16
The better-than-expected CPI and PPI reports (green) had no impact on the 10-year yield.
The worst-than-expected Michigan Survey (red), with its collapse in sentiment implying a severe slowdown or recession, did nothing to stop the drive in yields to the highs of the day.
How stressed are markets? By this metric, the most in 17 years.
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SPY = The S&P 500 Index Trust. This was the first ETF created in 1993 and is one of the largest at $575 billion.
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The middle panel is SPY's Net Asset Value (NAV). The price closed at a 90-basis-point premium to the underlying value of the assets.
The last time anything like this happened was 2008. To emphasize, not even in the crazy days of 2020 did its divergence get this big.
2/4
VOO = Vanguard S&P 500, $566 billion in assets
At the same time VOO, which is Vanguard's version of SPY, went out at one of its biggest discounts in years (middle panel).
3/4
Finally, IVV iShares Core S&P 500 ETF, $559 billion in assets
It has been trading at a persistent discount for a few weeks (middle panel).