ON DECK FOR THURSDAY, JULY 9th
KEY POINTS:
- Oil and bonds stabilize as markets debate tiff versus war scenarios
- Chinese CPI continues to sharply undershoot inflation target…
- …extending the debate around monetary easing
- German exports extend their winning ways
- Bank Negara holds with neutral bias as widely expected
- BoK reinforces hike expectations next week…
- …joining several other tightening Asia-Pacific central banks
- Mexican CPI unlikely to offer any surprises
- US claims, existing home sales on tap
Oil prices are little changed this morning and holding onto the roughly $5/barrel rise since Tuesday as markets debate whether continued bilateral strikes by the US and Iran overnight represent a mere setback or the resumption of outright war. Bond yields are slightly lower across the US and Europe after FOMC minutes came and went with no fanfare yesterday. Equities are mixed with marginal gains in US futures and Eurozone benchmarks while TSX futures and London’s FTSE slip. Other overnight developments were fairly light.
The PBOC Keeps Blowing its Inflation Target
Chinese CPI continues to merit debate over why the PBOC is not easing. At 1% y/y with core CPI matching, there is essentially no inflationary pressure in China. Month-over-month core CPI is tracking even weaker at seasonally adjusted and annualized rates (chart 1). Producer prices continue to accelerate (chart 2). The PBOC is on track to blow its lowered 2% inflation target after never hitting its 3% target for many prior years (chart 3) while house prices continue to tumble. The PBOC is clearly not serious about achieving the state’s inflation goal. It stopped lowering short-term rates with transmission into the key 1- and 5-year Loan Prime Rates after the last cut over a year ago (chart 4). Why?
One issue may be that further rate reductions would encounter inelastic money demand in the context of feared ongoing declines in property prices. Another may be because the authorities wish to continue cooling property markets after prior years of excess, although it has been five years of falling house prices. Another may be concern about yuan stability, yet the yuan has been appreciating since early last year from a dirty managed ped of about 7.3 to the dollar to 6.8 now. Producer price transmission into CPI hasn’t occurred yet but may be feared.
All that considered, with Q1 GDP growth of just 1.3% q/q SA and next week’s Q2 growth expected to land at 1%, thereby extending the six-quarter pattern of slower growth, it would seem that the authorities are a little too shy about doing what it takes to foster more rapid growth and contribute more to global growth.
Germany’s Export Machine Keeps Charging Ahead
German exports surprised higher with May’s reading up 0.9% m/m SA (-0.4% consensus) for the fourth straight monthly gain. Imports, however, fell by 2.5% m/m (-0.8% consensus) albeit after a string of three strong monthly increases.
Negara Holds, BoK Reinforces Hike Expectations
Bank Negara Malaysia left its overnight rate unchanged at 2.75% as universally expected while signalling that it views the current stance of monetary policy as appropriate relative to its forward views on growth and inflation.
More interesting was more hawkish guidance from the Bank of Korea overnight. Governor Shin Hyun Song guided said “it is considered necessary to raise the benchmark interest rate at an appropriate time” while flagging persistent inflationary pressure. The BoK is widely expected to raise its base rate by 25bps next Thursday, thereby joining other Asia-Pacific central banks that have already tightened such as the RBA, RBNZ, BSP plus the BoJ’s ongoing tightening campaign.
Light Data On Tap
On tap into the N.A. session are fairly light calendar-based developments with more of the focus likely to be on any surprises in the Middle East. We’ll get Mexican CPI for June (8amET) that is expected to ebb toward 3½% y/y with core fairly steady at 4.1% y/y; Mexico releases on a bi-weekly basis, so there is usually little surprise. Also due are US jobless claims (8:30amET) and June’s existing home sales (10amET).
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