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Wednesday’s inflation report expected to show CPI m/m: 0.3%e  v 0.1% prior; y/y: 3.1%e v 4.0% prior; Core CPI m/m: 0.3%e v 0.4% prior; Core CPI y/y: :5.0%e v 5.3% prior Fed’s Barr on banks: These changes would increase capital requirements overall Fed Mester noted that the funds rate will need to move up somewhat further from its current level and then hold there for a while   US stocks are wavering ahead of both a key inflation report that should core CPI remain sticky and what should be a rough earnings season. Friday’s employment report showed a hiring slowdown but also strong wage gains.  What will make this inflation report exciting is that we could see annual headline inflation fall to 2.8%, while core inflation remains hot, bolstered by housing inflation.  The steep decline in annual CPI won’t remain a recurring theme and pricing pressures might remain throughout the summer.  The big banks will kickoff earnings season and expectations are for the largest loan losses since the pandemic. Considering how high stocks have rushed higher, it will be difficult for this earnings season to deliver strong enough results for fresh highs.  China’s growth story remains a drag on the global economy.  Perhaps more important for markets was last night’s Chinese prices data.  China saw CPI post the lowest reading in 2 years, with a 0% year-over-year reading, while producer prices plunged 5.4% from a year earlier, the worst decline since December 2015.  It is getting uglier in China and that is why officials are scrambling to deliver more support to real estate developers.  The real estate crisis has been lingering for a couple of years and it is messing up their COVID reopening.  The PBOC is going to do more, but this piecemeal policy support strategy is not working.  Treasury Secretary Yellen’s trip to Beijing was positive but nothing meaningful was expected to be achieved. Yellen assuaged concerns that harsh restrictions might not get imposed by both countries.  The US needs China’s rare minerals and China needs foreign chips.    

Would we spot a bubble forming this time round? Looking back on it, the causes of the bubble and its subsequent crash are not as obvious as the convenient explanation I have just provided. Policy rates were not all that low relative to inflation, and the appreciation of the JPY following the Plaza Accord should have provided a substantial degree of financial tightening too. Broad money growth also was not so obviously out of control, at least relative to previous decades. It is hard to say we would definitely avoid doing something similar again now, even with the benefit of hindsight. That said, there is no arguing with the carnage that followed. Japan suffered a textbook case of genuine deflation – a term that is often misused, experiencing widespread and deep declines in the general price level, by which we mean not just consumer prices, but real assets, financial assets, and nominal wages.   Is there any sign of something similar in China? So let’s take a look at what is happening in China and pick apart the deflation argument. Firstly, let’s look for evidence of a bubble because if we are going to argue that it is about to burst, it needs to be there in the first place. In 1984, land prices for commercial property in Tokyo grew at a respectable 7.2% annual pace, The following year, this accelerated to 12.5%, and the year after that, to 48.2%. By 1987, commercial property land prices were rising at a 61.1% YoY pace. It was once suggested that the 1.5 square kilometres of land surrounding the Imperial Palace in Tokyo, were worth more than all the land in California. And whether or not that calculation stacks up (it sounds highly questionable), it shows just how extreme things had become. Yes, Japan had a bubble. If we use similar land price data for Beijing for both residential and commercial property, then there are certainly periods when prices accelerate sharply. The most recent period where this happened was between 2014 and 2017 when residential property prices accelerated at about a 20% annual pace. But it has slowed since and is showing small declines now.    Tokyo vs Beijing residential property prices    

FX Daily: Dollar benefits from a lack of alternatives The US remains on an encouraging disinflation track, but the dollar is not turning lower. This is, in our view, due to a lack of attractive alternatives given warning growth signals in other parts of the world (such as the eurozone and China). Evidence of a US economic slowdown is needed to bring USD substantially lower.   USD: Disinflation not enough for the bears July’s US inflation numbers released yesterday were largely in line with expectations, reassuring markets that there are no setbacks in the disinflationary process for now. Core inflation inched lower from 4.8% to 4.7%, while the headline rate suffered a rebound (from 3.0% to 3.2%) due to a reduced base effect compared to previous months, which was still smaller than the consensus of 3.3%. With the exception of resilience in housing prices, price pressures clearly abated across all components. All in all, the US report offered reasons for the Fed and for risk assets to cheer, as the chance of another rate hike declined further. Equities rallied and the US yield curve re-steepened: the dollar should have dropped across the board in this scenario. However, the post-CPI picture in FX was actually more mixed. This was a testament to how currencies are not uniquely driven by US news at the moment. The Japanese yen drop was not a surprise, given abating bond and FX volatility, equity outperformance and carry-trade revamp, but FX markets seemed lightly impacted by CPI figures and the subsequent risk-on environment, as many high-beta currencies failed to hang on to gains. From a dollar point of view, we think the recent price action denotes a reluctance to rotate away from the greenback given the emergence of concerning stories in other parts of the world. This is not to say that the activity outlook in the US is particularly bright – jobless claims touched a one-month high yesterday, and the outlook remains very vulnerable to deteriorated credit dynamics – but if economic slowdown alarms are flashing yellow in Washington, they are flashing amber in Frankfurt and Beijing. Chinese real estate developer Garden reported a record net loss of up to $7.6bn during the first half of the year yesterday, at a time when China’s officials are trying to calm investors’ nerves about another potential property crisis. Back to the US, PPI and the University of Michigan inflation expectation figures out today will clarify how far the disinflation story has gone in July, but we still sense a substantial dollar decline is not on the cards for the moment, or at least until compelling evidence of slowing US activity makes the prospect of Fed cuts less remote. DXY may consolidate above 102.00 over the next few days.

Here, get more stimulus!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) Chair Jerome Powell's Jackson Hole speech was boring, wasn't it? Powell repeated that inflation risks remain to the upside despite recent easing and pointed at resilient US growth and tight US jobs market, and reiterated the Fed's will to keep the interest rates at restrictive levels for longer. The US 2-year pushed above 5%, as Powell's comments kept the idea of another 25bp hike on the table before the year end, but the rate hike will probably be skipped in September meeting and could be announced in the November meeting instead, according to activity on Fed funds futures. The US 10-year yield is steady between the 4.20/4.30%. The S&P500 gained a meagre 0.8% last week, yet managed to close the week above the 4400 mark and above its ascending trend base building since last October, while Nasdaq 100 gained 2.3% over the week, although Nvidia's stunning results failed to keep the share price above the $500 mark, even though that level was hit after the results were announced last week. And the disappointing jump in Nvidia despite beating its $11bn sales forecast and despite boosting its sales forecast for this quarter to $16bn, was a sign that the AI rally is now close to exhaustion.   What's up this week?  This week will be busy with some important economic data from the US. We will watch JOLTS job openings tomorrow, Australian and German CPIs and US ADP and GDP reports on Wednesday, to see if the US economy continues to be strong, and the jobs market continues to be tight. On Thursday, Chinese PMI numbers, the Eurozone's CPI estimate and the US core PCE will hit the wire, and on Friday, we will watch the US jobs report and ISM numbers. Note that the US dollar index pushed to the highest levels since May after Powell's Jackson Hole speech. The EURUSD is now trading a touch below its 200-DMA, even though the European Central Bank (ECB) chief Lagarde repeated that the ECB will push the rates as high as needed. Yet, the worsening business climate, and expectations in Germany somehow prevent the euro bulls from getting back to the market lightheartedly, while the yen shorts are comforted by the Bank of Japan (BoJ) governor's relaxed view on price growth – which remains slower than the BoJ's goal, but the possibility of a direct FX intervention to limit the USDJPY's upside potential keeps the yen shorts reasonably on the sidelines, despite the temptation to sell the heck out of the yen with the BoJ's incredible policy divergence versus the rest of the developed nations.   Here, get more stimulus!  The week started upbeat in China and in Hong Kong, after the government announced measures to boost appetite for Chinese equities. Beijing halved the stamp duty on stock trades, while Hong Kong said it plans a task force to boost liquidity. The CSI 300 rallied more than 2% and HSI jumped more than 1.5%. But gains remain vulnerable as data released yesterday showed that Chinese company profits fell 6.7% last month from a year earlier. That's lower than 8.3% printed in June, but note that for the first seven months of 2023, profits declined 15.5%, and that is highly disquieting given the slowing economic growth and rising deflation risks, along with the default risks for some of the country's biggest companies. Evergrande, for example, posted a $4.5 billion loss in the H1.  Therefore, energy traders remain little impressed with China stimulus measures. The barrel of US crude trades around the $80pb level, yet the failure to break below a major Fibonacci support last week – major 38.2% Fibonacci retracement on the latest rally, keeps oil bulls timidly in charge of the market despite the weak China sentiment. Oil trading volumes show an unusual fall since July when compared to volumes traded in the past two years. That's partly due to weakening demand fears and falling gasoline inventories, but also due to tightening oil markets as a result of lower OPEC supply. We know that the demand will advance toward fresh records despite weak Chinese demand. We also know that OPEC will keep supply limited to push prices higher. Consequently, we are in a structurally positive price setting, although any excessive rally in oil prices would further fuel inflation expectations, rate hike expectations and keep the topside limited in the medium run.    

FX Daily: Peso too strong, renminbi too weak, dollar just right FX markets await today's release of the August US jobs report to see if we've reached any tipping point in the labour market. Probably not. And it is still a little too early to expect the dollar to embark on a sustained downtrend. Elsewhere, policymakers in emerging markets are addressing currencies that are too weak (China) and too strong (Mexico).   USD: The market seems to be bracing for soft nonfarm payrolls data Today's focus will be the August nonfarm payrolls jobs release. The consensus expects around a +170k increase on headline jobs gains, although the "whisper" numbers are seemingly nearer the +150k mark. Importantly, very few expect much change in the 3.5% unemployment rate. This remains on its cycle lows, continues to support strong US consumption, and keeps the Fed on its hawkish guard. We will also see the release of average hourly earnings for August, which are expected to moderate to 0.3% month-on-month from 0.4%. As ING's US economist James Knightley notes in recent releases on the US economy and yesterday's US data, there are reasons to believe that strong US consumption cannot roll over into the fourth quarter and that a recession is more likely delayed than avoided. But this looks like a story for the fourth quarter. Unless we see some kind of sharp spike higher in unemployment today, we would expect investors to remain comfortable holding their 5.3% yielding dollars into the long US weekend. That is not to say the dollar needs to rally much, just that the incentives to sell are not here at present. If the dollar is at some kind of comfortable level, policy tweaks in the emerging market space over the last 24 hours show Beijing trying to fight renminbi weakness and Mexico City trying to fight peso strength (more on that below). We suspect these will be long, drawn-out battles with the market. DXY can probably stay bid towards the top of a 103-104 range.

China gold imports fall Meanwhile, China’s gold imports fell in June but ended the first half of the year with a year-on-year rise. In June, gold imports totalled 98 tonnes, 50 tonnes lower than in May, according to data from the World Gold Council. However, the month-on-month drop may have been driven by a low local gold price premium, disincentivising importers. The second quarter is also usually an off-season for gold demand in China. This brings China’s first half of the year gold imports to 792 tonnes, a pickup of 400 tonnes compared with the first half of 2022, according to the World Gold Council data. However, measures released by Beijing over the last couple of weeks to stimulate the flagging economy could benefit gold consumption in the country.   US Fed policy remains key theme for gold The future direction of Fed policy will remain a central theme for gold prices for the months ahead. We believe the downside remains limited for prices as the Fed is close to the end of its monetary tightening cycle. Rising interest rates have been a significant headwind for gold for more than two years now.  September appears set for a pause given recent encouraging signals on inflation and labour costs, but robust activity data mean the door remains ajar for a further potential hike. Markets see a 50-50 chance of a final hike while our US economist believes that rates have most probably peaked. We see gold prices moving higher towards the end of the year, given the Fed should start to cut rates in the first quarter of 2024, while geopolitical tensions and macroeconomic uncertainties will also provide headwinds for gold prices going forward. We forecast prices to average $1,900/oz in the third quarter and $1,950/oz in the fourth. We expect prices to move higher again in the first quarter of 2024 to average $2,000/oz on the assumption that the Fed will start cutting rates in the first quarter of next year.   ING forecast

Asia Morning Bites Asian markets digesting Friday's US labour report data and latest property support measures in China.   Global Macro and Markets Global markets: Friday’s soft US labour report got a mixed reception from equity markets, though stocks ended up virtually unchanged on the previous day’s close. Chinese stocks were also mixed, despite new measures to support the property market and the CNY. The Hang Seng fell 0.55%, while the CSI 300 gained 0.7%. Yields on US Treasuries dropped sharply following the labour report, but fully recovered and ended slightly higher. The 10Y yield rose 7.1bp to 4.179%. This feels like an odd move. What also looks a little strange is the USD strength that has taken EURUSD down to 1.0775. We also see USD strength against the AUD, which is down to 0.6452. Cable has dropped to 1.2590 and the JPY, which after strengthening to below 144.50 has weakened back above 146. Asian currencies were fairly range-bound on Friday, though will probably catch up with their G-10 counterparts in early trading today. It is a public holiday (Labor Day) in the US today.   G-7 macro: US payrolls for August rose by 187 thousand, a little more than the 170 thousand expected. But there were a net 110 thousand downward revisions to past months, so the trend growth rate looks a bit weaker than it did. Adding to the general sense that the labour market is finally showing some signs of softening, the unemployment rate rose from 3.5% to 3.8%, and the average hourly earnings rate fell slightly to 4.3%YoY from 4.4% alongside a slight rise in the participation rate. Offsetting the labour market data, the manufacturing ISM index was a bit stronger than expected, though still consistent with the sector contracting.    China:  Cuts to China’s FX reserve requirements on Friday helped the CNY to trade a bit stronger than it has done recently, and there may also have been support from new policy measures to support the property markets in Shanghai and Beijing. However, it is not clear how much additional demand will be generated from lower down payments for properties and encouragement for banks to lower mortgage rates further. It won’t hurt though. Country Garden has won acceptance for its plan to extend payment on its CNY3.9bn onshore bond, though the fate of the USD 22.5mn bond payment due on 6/7 September remains unclear.   What to look out for: Regional trade and inflation data out later in the week Japan monetary base (4 September) Australia Melbourne institute inflation (4 September) South Korea GDP and CPI inflation (5 September) Japan Jibun PMI services (5 September) Regional PMI (5 September) China Caixin PMI services (5 September) Philippines CPI inflation (5 September) Thailand CPI inflation (5 September) Australia RBA decision (5 September) Singapore retail sales (5 September) US factory orders and durable goods orders (5 September) Australia GDP (6 September) Taiwan CPI inflation (6 September) US trade balance and ISM services (6 September) China trade balance (7 September)  Australia trade balance (7 September) Malaysia BNM policy (7 September) US initial jobless claims (7 September) Japan GDP (8 September) Philippines trade balance (8 September) Taiwan trade balance (8 September) US wholesale inventories (8 September)

FX Daily: Is less growth pessimism enough? PMIs came in stronger than expected in the eurozone and the UK yesterday and will be released in the US today. Despite the notion that eurozone growth pessimism may have peaked, rate differentials still point to a weaker EUR/USD. We see EUR/GBP staying pressured. Riksbank FX sales will be in focus after yesterday's hold, and we don't expect any more hikes.   USD: Half-day trading US markets reopen today after the Thanksgiving holiday, but only for a half-day session. Expect volumes to be very thin again. On the data side, we’ll see the release of US S&P PMIs, a piece of data that has triggered a growing market impact, but may fail to decisively steer the dollar in a low-volume day. As we had expected, the dollar is stabilising amid reduced Thanksgiving flows, and an attempt to rally from the euro and sterling following somewhat encouraging PMIs didn't last much longer.  The quieter US calendar has seen market focus being re-directed, namely on oil market developments, a ceasefire in the Israel-Hamas conflict and Chinese real estate news. On the former, the decision by OPEC+ to delay its meeting scheduled for this weekend due to disagreement on output cuts took a brief hit on crude earlier this week. Our commodities team notes that the ongoing disagreement between members will likely increase volatility within the market over the course of the next week, although it is unclear how this will affect broader policy. In China, we saw an unprecedented policy discussion by the central government to support the real estate sector, as it reportedly planning to allow banks to issue unsecured short-term loans to qualified developers. We would be cautious to think that this will spur a round of optimistic buying on Chinese assets. While it is a positive development on paper, it does signal a very concerned mood in Beijing about the developers' crisis. It should be a relatively quiet day in FX today. We expect the dollar to keep stabilising around current levels. The next two weeks will set the tone for FX markets into Christmas, with key data (like payrolls) published in the US.

FX Daily: Asia in the driver's seat The dollar is softer and pro-cyclical currencies are following the yuan higher after news that China is preparing a CNY 2tn rescue package for the stock market. The BoJ revised inflation expectations lower but signalled further progress towards the target, keeping anticipation for a hike in June alive. We expect New Zealand CPI to be soft tonight.   USD: China and Japan in focus The dollar has been mostly moved by developments from outside of the US since the start of the week. China remains the centre of attention before key central bank meetings in the developed world. Risk sentiment was boosted overnight as the Chinese government is reportedly considering a large CNY 2tn package to support the struggling stock markets. The rescue plan should be mostly targeted to the Hang Seng stock exchange, which has sharply underperformed global equities of late. This is a strong message that conveys Beijing’s intention to artificially support Chinese markets in spite of the deteriorating economic outlook in the region, and it is reported that other measures are under consideration. It does appear a temporary solution, though. Ultimately, stronger conviction on a Chinese economic rebound is likely necessary to drive a sustainable recovery in Chinese-linked stocks. For now, the FX impact has been positive; USD/CNY has dropped to 7.16/7.17 and we are seeing gains being spread across pro-cyclical currencies as safe-haven flows to the dollar are waning. Doubts about the impact of Beijing rescue package’s effects beyond the short-term automatically extend to the FX impact. It does seem premature to call for an outperformance of China-linked currencies (like AUD and NZD) and softening in the dollar on the back of this morning’s headlines. Another important development in Asian markets overnight was the Bank of Japan policy announcement. In line with our expectations and market consensus, there were no changes to the yield curve control, and forward guidance remained unchanged. Inflation projections were revised lower from 2.8% to 2.4% for the fiscal year starting in April. The revision was mostly a consequence of declining oil prices, and the inflation path continues to show an overshoot of the target for some time. All this was largely expected, and markets are focusing on Governor Kazuo Ueda’s claim that Japan has continued to inch closer to the inflation goals, keeping expectations for an eventual end to the ultra-dovish policy stance some time this year. The yen is experiencing a rebound which is likely boosted its oversold conditions. Money markets currently price in a 10bp rate hike in June. Extra help from a declining USD this morning might push USD/JPY a bit lower (below 147) today, but we suspect that markets may favour defensive USD positions as the Fed meeting approaches. Domestically, the only release to watch today in the US is the Richmond Fed Manufacturing index, which will give some flavour about the state of the sector ahead of tomorrow’s S&P Global PMIs. DXY may stabilise slightly below 103.00 once the China-led risk rally has settled.