Analysts at TD Securities (TDS) upgrade their growth forecast for China following Tuesday's release of the Q1 GDP, which showed that the world's second-largest economy expanded by 4.5% against the 4.0% expected and the 2.9% previous.

Key quotes:

“Various sentiment data and high frequency measures have shown strong momentum while hard data in the form of today's release of Q1 GDP, March industrial production and retail sales have been firm. As a result, our China Economic Surprise Index has surged to a multi-year high as Chinese data have repeatedly beaten expectations. Although we remain cautious about the momentum of growth in the months ahead and see likely below trend growth in H2 2023, our current 5.3% GDP forecast for 2023, while still above the official forecast of around 5.0%, appears to be conservative. As such, we upgrade our GDP forecast to 6.0% this year.”

“The market impact has been muted, and we think this is largely a function of markets placing more focus on the Fed with US rates backing up recently. This may explain the limited reaction in USDCNH and CGB 10Y yields after the strong Chinese data, in contrast to the positive price action from onshore equities. Despite the banking turmoil, hawkish comments from senior members of the FOMC suggest that the Fed's hiking cycle isn't over and markets are reassessing the Fed Funds trajectory for the year. This should keep the USD supported in the short term, while a string of firmer US data may seal the case for another 25bps hikes from the Fed. Thus, we think USDCNY will likely continue to consolidate further in a 6.83-6.95 range though we think the eventual path for the pair is lower given our bearish USD profile and a more positive China outlook.”