PPI figures

Is China on path for longer economic stagnation?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the latest CPI data showed that the headline inflation in the US ticked higher from 3 to 3.2%. That was slightly lower than the 3.3% penciled in by analysts, core inflation eased to 4.7% in July from 4.8% expected by analysts and printed a month earlier.   But the rising energy and crop prices threaten to heat things up in the coming months and inflation's downward trajectory could rapidly be spoiled. That's certainly why an increasing number of investors and the Federal Reserve's (Fed) Mary Daly warned that this was 'not a data point that says victory is ours'.   And indeed, looking into details, the fact that the 20% fall in gasoline prices is what explains the decline in headline number is concerning. The barrel of US crude bounced lower yesterday after a 27% rally since the end of June, and the latest OPEC data indicated that we would see a sharp supply deficit of more than 2mbpd this quarter as Saudi cuts output to push prices higher. And this gap could further widen as global demand continues growing and shift to alternative energy sources is nowhere fast enough to reverse that upside pressure.   On the other hand, we also know that the rising energy prices fuel inflation expectations and further rate hikes expectations around the world. And that means that oil bears are certainly waiting in ambush to start trading the recession narrative and sell the top. The $85pb could be the level that could trigger that downside correction despite the evidence of tightening supply and increasing gap between rising demand and falling supply.   Today, eyes will be on the July PPI figures before the weekly closing bell, where core PPI is seen further easing, but headline PPI may have ticked higher to 0.7% on monthly basis, probably on higher energy, crop and food prices.     In the market  Yesterday's slightly softer-than-expected inflation numbers and the initial jobless claims which printed almost 250K new applications last week - the highest in a month - sent the probability of a September pause to above 90%, though the US 2-year yield advanced past the 4.85% level, and the longer-terms yields rose with a weak 30-year bond action, which saw the highest yield since 2011.   Major stock indices stagnated. The S&P500 was up by only 0.03% yesterday while Nasdaq 100 closed 0.18% higher, as Walt Disney rallied as much as 5% even though Disney+ missed subscription estimates and said that it will increase the price of the streaming service. Disney is considering a crackdown on password sharing, which, combined with higher prices could lead to a Netflix-like profit jump further down the road.     In the FX  The USD index consolidates above the 50 and 100-DMAs and just below a long-term ascending channel base. The EURUSD sees support at the 50-DMA, near the 1.0960 level, and could benefit from further weakness in the US dollar to attempt another rise above the 1.10 mark.   European nat gas futures fell 7% yesterday after a 28% spiked on Wednesday on concerns that strikes at major export facilities in Australia could lead to a 10% decline in global LNG exports. Yet, the European inventories are about 88% full on average and the industrial demand remains weak due to tightening financial conditions imposed by the European Central Bank (ECB) hikes. Therefore this week's massive move seems to be mostly overdone, and we shall see some more downside correction.     Chinese property market is boiling  The property crisis in China is being fueled by a potential default of Country Garden, which is one of the biggest property companies in China and which recently announced that it may have lost up to $7.6bn in the first half of the year as home sales slumped and the government stimulus measures didn't bring buyers back to the market. Equities in China slumped further today, as property crisis is not benign. In fact, China's local governments have plenty of debt, and their major source of income is... land and property sales. Consequently, the property crisis explodes local governments' debt to income ratios- And the debt burden prevents China from rolling out stimulus measures that they would've otherwise, because the government doesn't want to further blast the debt levels.   Shattered investor and consumer confidence, shrinking demographics, property crisis and deflation hints that the Chinese economy could be on path for a longer period of economic stagnation. We could therefore see rapid pullback in investor optimism regarding stimulus measures and their effectiveness. Hang Seng's tech index fell to the lowest levels in two weeks yesterday, as all members fell except for Alibaba which jumped after beating revenue estimates last quarter.   

US The month started with a bang with the US jobs report but the following week is looking a little more subdued, starting with the bank holiday on Monday. Economic data is largely made up of revisions and tier-three releases. The exceptions being the ISM services PMI on Wednesday and jobless claims on Thursday. That said, revised productivity and unit labor costs on Thursday will also attract attention given the Fed’s obsession with input cost, wages in particular. We’ll also hear from a variety of Fed policymakers including Susan Collins on Wednesday (Beige Book also released), Patrick Harker, John Williams, and Raphael Bostic on Thursday, and Bostic again on Friday.  Eurozone Next week is littered with tier-three events despite the large number of releases in that time. Final inflation, GDP and PMIs, regional retail sales figures and surveys, and trade figures make up the bulk of next week’s reports. Not inconsequential, per se, but not typically big market events unless the PMI and CPI reports bring massive revisions. We will hear from some ECB policymakers earlier in the week which will probably be the highlight, including Christine Lagarde, Fabio Panetta, Philip Lane, and Isabel Schnabel. UK  Next week offers very little on the data front but the Monetary Policy Report Hearing in front of the Treasury Select Committee on Wednesday is usually one to watch. While the committee’s views are typically quite polished by that point, the questioning is intense and can provide a more in-depth understanding of where the MPC stands on interest rates.  Russia Inflation in Russia is on the rise again and is expected to hit 5.1% on an annual basis in August, up from 4.3% in July. That is why the CBR has started raising rates aggressively again – raised to 12% from 8.5% on 15 August. Even so, the ruble is not performing well and isn’t too far from the August highs just before the superhike. We’ll hear from Deputy Governor Zabotkin on Tuesday, a few days before the CPI release. South Africa Further signs of disinflation in the PPI figures on Thursday will have been welcomed by the SARB but they won’t yet be declaring the job done despite the substantial progress to date. The focus next week will be on GDP figures on Tuesday, with 0.2% quarterly growth expected, and 1.3% annual. The whole economy PMI will be released earlier the same day. Turkey CPI inflation figures will be eyed next week, with annual price growth seen hitting 55.9%, up from 47.8% in July. The CBRT is all too aware of the risks, hence the surprisingly large rate hike – from 17.5% to 25% – last month. The currency rebounded strongly after the decision but it has been drifting lower since, falling back near the pre-meeting levels. There’s more work to be done. Switzerland Another relatively quiet week for the Swiss, with GDP on Monday – seen posting a modest 0.1% quarterly growth – and unemployment on Thursday, which is expected to remain unchanged. Neither is likely to sway the SNB when it comes to its next meeting on 21 September, with markets now favoring no change and a 30% chance of a 25 basis point hike. China Two key data to focus on for the coming week; the non-government compiled Caixin Services PMI for August out on Tuesday which is expected at 54, almost unchanged from July’s reading of 54.1. If it turns out as expected, it will mark the eighth consecutive month of expansion in China’s services sector which indicates resilience despite the recent spate of deflationary pressures and contagion risk from the fallout of major indebted property developers that failed to make timely coupon payments on their respective bonds obligations. Next up will be the balance of trade data for August on Thursday with export growth anticipated to decline at a slower pace of 10% y/y from -14.5% y/y recorded in July. Imports are expected to contract further by 11% y/y from -12.4% y/y in July.   Interestingly, several key leading economic data announced last week have indicated the recent doldrums in China will start to stabilize and potentially turn a corner. The NBS manufacturing PMI for August came in better than expected at 49.7 (consensus 49.4), and above July’s reading of 49.3 which makes it three consecutive months of improvement, albeit still in contraction.   In addition, two sub-components of August’s NBS manufacturing PMI; new orders and production are now in expansionary mode with both rising to hit their highest level since March 2023 at 50.2 and 51.9 respectively. Also, the Caixin manufacturing PMI for August has painted a more vibrant picture with a move back into expansion at 51 from 49.2 in July, and above the consensus of 49.3; its strongest pace of growth since February 2023. Hence, it seems that the current piecemeal fiscal stimulus measures have started to trickle down positively into China’s economy. India The services PMI for August will be released on Tuesday where the consensus is expecting a slight dip in expansion to 61 from 62.3 in July, its highest growth in over 13 years. Capping off the week will be August’s bank loan growth out on Friday. Australia The all-important RBA monetary policy decision will be released on Tuesday. A third consecutive month of no change in the policy cash rate is expected, at 4.1%, as the recently released monthly CPI indicator has slowed to 4.9% y/y from 5.4% y/y, its slowest pace of increase since February 2022 and below consensus of 5.2% y/y. Interestingly, the ASX 30-day interbank cash rate futures on the September 2023 contract have indicated a 14% chance of a 25-basis point cut on the cash rate to 3.85% for this coming Tuesday’s RBA meeting based on data as of 31 August 2023. That’s a slight increase in odds from a 12% chance of a 25-bps rate cut inferred a week ago. On Wednesday, Q2 GDP growth will be out where consensus is expecting it to come in at 1.7% y/y, a growth slowdown from 2.3% y/y recorded in Q1. To wrap up the week, the balance of trade for July will be out on Thursday where the consensus is expecting the trade surplus to narrow to A$10.5 billion from a three-month high of A$11.32 billion recorded in June.  New Zealand Two data to watch, Q2 terms of trade on Monday and the global dairy trade price index on Tuesday. Japan A quiet week ahead with the preliminary leading economic index out on Thursday and the finalized Q2 GDP to be released on Friday. The preliminary figure indicated growth of 6% on an annualized basis that surpassed Q1’s GDP of 3.7% and consensus expectations of 3.1%; its steepest pace of increase since Q4 2020 and a third consecutive quarter of annualized economic expansion. Singapore Retail sales for July will be out on Tuesday with another month of lackluster growth expected at 0.9% y/y from 1.1% y/y in June; its softest growth since July 2021 as the Singapore economy grappled with a weak external environment. On a monthly basis, a slower pace of contraction is expected for July at -0.1% m/m versus -0.8% m/m in June.  

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.