MNI EUROPEAN MARKETS ANALYSIS: Worst Of China Deflation May Be Behind Us

CHINA DATA: Negative CPI Y/Y Momentum Expected To Be Temporary, PPI Deflation Moderates

China July inflation outcomes were close to expectations. The headline y/y CPI printed at -0.3%, versus -0.4% consensus forecast and flat prior. The m/m was +0.2%, versus -0.2% in June. This is actually the first m/m rise in the headline since January of this year. Services inflation rose 1.2% y/y, while for consumer goods, we slipped further into deflation at -1.3%, the fourth straight month of negative y/y outcomes.

• The core CPI measure rose to 0.8% y/y, versus 0.4% in June. This puts us back into the range that has prevailed for this metric since late last year. The chart below overlays this against the 2yr government bond yield.
• In terms of the detail, 7 out of 8 sub categories saw a firmer y/y readings compared to June. Recreation and education were a noticeable increase (up to 2.4% y/y from 1.5%). Only food fell, down to -0.5% from 2.0% in June.
• So, some signs of less deflation, coupled with more favorable base effects, suggests headline inflation in y/y terms can track higher in H2. The NBS stated as much post this data indicating the y/y drop is temporary.
• Still, market confidence around the growth backdrop is likely to far from assured.

Fig 1: China Core CPI Y/Y & 2yr Government Bond Yield

Source: MNI - Market News/Bloomberg

• On the PPI side, we were slightly below consensus at -4.4% y/y (versus -4.0% forecast) but improved on the June outcome of -5.4%. The detail showed less deflation in mining -14.7% y/y (prior -16.2%) and raw materials -7.6%y/y (-9.5% prior), which is line with higher spot commodity prices.
• Manufacturing price falls eased to -3.8% (prior -4.7%), while consumer goods remain in deflation at -0.4%, weighed by durables at -1.5%.
• Reduced PPI deflation argues for less CNY NEER weakness, albeit at the margins, see the second chart below. The CNY NEER has stabilized in recent weeks, but remains comfortably in negative y/y territory.

Fig 2: China PPI Y/Y & CNY NEER Y/Y

Source: MNI - Market News/Bloomberg

US TSYS: Curve Marginally Flatter In Asia

TYU3 deals at 111-15, +0-02, a 0-07 range has been observed on volume of ~71k.

• Cash tsys sit flat to 2bps richer across the major benchmarks, the curve has bull flattened.
• Tsys were firmer in early dealing as local participants digested yesterday's dovish Fedspeak by Philadelphia Fed President Harker as well as a strong 3 Year auction. Gains marginally extended alongside a recovery off early session lows in e-minis.
• The move higher didn't follow through and tsys ticked away from early session highs, a firmer than forecast Chinese CPI print weighed at the margins.
• Tsys observed narrow ranges for the remainder of the session.
• There is a thin data calendar in Europe today, further out the docket is thin with just MBA Mortgage Applications due. We also have the latest 10-Year supply.

JGBS: Futures Holding Gains, Light Calendar, 10Y Yield Below 0.60%

JGB futures are holding early session gains in the Tokyo afternoon session, + 31 compared to settlement levels.

• The local docket has been light today, with M2 & M3 money stocks as the only releases so far. Machine Tool Orders are due later.
• Accordingly, the gains through the Tokyo morning session appear linked to a richening in US tsys in Asia-Pac trade, although they are now off bests. US tsys are dealing flat to 2bp richer with the curve flatter.
• Cash JGBs have bull flattened with 0.6bp to 4.1bp lower beyond the 1-year zone. The benchmark 10-year yield is 2.1bp lower at 0.589%, above BoJ's YCC old limit of 0.50% but below its new hard limit of 1.0%.
• The Japan 10-year real yields fell 1.1bp to -0.53% on Wednesday from the previous business day, according to Bloomberg. Real yields have risen 11bp this month. (See link)
• Swap rates are lower across the curve. Swap spreads are wider across the curve.
• Tomorrow the local calendar sees International Investment Flow, PPI and Tokyo Office Vacancies data.
• The US docket is thin later today with just MBA Mortgage Applications due.

AUSSIE BONDS: Mixed, Off Bests, Spillover From US Tsys & NZGBs

ACGBs (YM -1.0 & XM +2.0) are dealing mixed and near Sydney session lows. Without economic data or local headlines, the domestic market has been guided by US tsys in Asia-Pac trade.

• US tsys have ticked away from session highs in recent dealing after official CPI from China for July was a touch firmer than forecast. 10-year US tsy supply later today.
• Higher NZGB yields following the lift in RBNZ 2-year inflation expectations may also have weighed on short-end ACGBs at the margin.
• The latest round of ACGB Jun-35 supply sees smooth digestion with a higher outright yield and steeper curve seemingly supporting demand. However, the cover ratio was lower than the previous auction.
• The cash ACGB curve twist flattens with yields 1bp higher to 2bp lower. The AU-US 10-year yield differential is at -2bp.
• The swaps curve also twist flattens with rates 2bp higher to 1bp lower.
• Bills strip is cheaper with pricing -1 to -4, with whites leading.
• RBA-dated OIS pricing is 1-4bp firmer with ’24 meetings leading.
• Tomorrow the local calendar sees Consumer Inflation Expectations data.
• The US docket is thin today with just MBA Mortgage Applications due.

AUSSIE BONDS: AU-US 10-Year Yield Differential Is Too Tight

After having tested the upper boundary of its trading range since November 2022 around mid-June, the AU-US 10-year yield differential has now slipped back into negative territory. As of the time of writing, this differential stands at -3bp, a notable contrast to the +25 to +30bp range observed in mid-June.

• The contraction in the 10-year yield differential starting mid-June can be attributed to a nearly 60bp reduction in the AU-US 1Y3M swap differential. This trend aligns with the decline in expectations for the RBA's terminal rate, which shifted from 4.66% to 4.18% during that timeframe.
• However, over the past week, the AU-US 1Y3M swap differential has surged by 17bp.
• Applying a simple regression of the AU-US cash 10-year yield differential against the 1Y3M swap differential throughout the current tightening cycle reveals that the current 10-year yield differential is approximately 13bp tighter than its fair value (specifically, -3bp compared to +10bp).

Figure 1: AU-US Cash 10-Year Yield Differential (%) Vs. Model Fair Value (%)

Source: MNI – Market News / Bloomberg

NZGBS: Richer But Off Bests After RBNZ’s 2Y Inflation Expectations Rise

NZGBs closed flat to 2bp richer, but off session bests after the RBNZ’s 2-year inflation expectations printed at 2.83% in Q3 vs 2.79% in Q2. Nevertheless, the outcomes for the two-year results fall within the central bank's designated target range of 1% to 3%. This suggests that even in the event of the RBNZ increases the OCR again, the likelihood of substantial tightening remains low.

• The RBNZ's Survey of Expectations represents respondents' expectations and not the Bank's. Additionally, 1-year inflation expectations printed at 4.17% in Q3 vs 4.28% in Q2. (See link)
• US tsys have ticked away from session highs in recent dealing after official CPI from China for July was a touch firmer than forecast weighing at the margins.
• Swap rates are 1-3bp lower, with the 3s10s curve flatter.
• RBNZ dated OIS pricing closed flat to 2bp softer across meetings, with terminal OCR expectations at 5.65%.
• Total spending on debit and credit cards for the month of July declined 0.9% m/m, +4.7% y/y. Core retail spending printed -0.1% m/m, +4.9% y/y.
• Tomorrow the local calendar has no data.
• However, the NZ Treasury plans to sell NZ$275mn of the 0.5% May-26 bond, NZ$150mn of the 2.0% May-32 bond and NZ$75mn of the 2.75% Apr-37 bond.

NZ DATA: 1-Year Inflation Expectations Ease To Lowest Since End-2021

Business inflation expectations for Q3 are unlikely to shift the RBNZ from its neutral stance. The expected CPI one year out is expected to rise 4.2% down from 4.3% in Q2 and off the peak of 5.1% in Q1. It is the lowest reading since Q4 2021. Two years ahead was steady at 2.8%. Both 1 year ahead business and household inflation expectations have high correlations with headline and core CPI and so are useful price indicators, but the consumer measure has been stickier this year.

NZ Inflation expectations vs CPI y/y%

Source: MNI - Market News/Refinitiv

EQUITIES: China & Japan Modestly Weaker, South Korea Shares Outperform

Outside of higher South Korea equities, and some pockets of strength in SEA, most regional markets are tracking lower at this stage. US equities are a touch higher but have mostly been range bound so far in Wednesday trade. Eminis were last around 4521, while Nasdaq futures are slightly outperforming in percentage terms. This follows weakness in Tuesday trade in the US for cash equities, although the major benchmarks trimmed losses into the close.

• South Korea shares were higher from the open, despite the negative tech lead from US indices on Tuesday. The Kospi is +1.2% higher at this stage, while the Kosdaq is +2%. Retail investors have reportedly supported the market, particularly in terms of the tech sector.
• China and Hong Kong markets started off weaker before recovering ground. Major indices are lower at the break but away from session lows. The HSI close to flat, with China developer Country Garden rebounding from earlier losses. Onshore media reported that tier 1 cities are to discuss easing property restrictions this month.
• In China the CSI 300 sits down -0.22%. This leaves the index very much within recent ranges. July inflation data was close to expectations and the underlying detail, coupled with base effects, suggests headline CPI deflation won't persist.
• In Japan, the major indices are off by around 0.50-0.60% at this stage, with the machinery sector weighing.
• In SEA we are seeing modest gains for Malaysian and Indonesian shares. Indian shares have opened up weaker though.
• The ASX 200 is a touch higher (+0.15%) as CBA leads bank shares higher after a strong earnings result.

FOREX: USD Marginally Lower In Asia

The greenback is sitting a touch lower in Asia today, BBDXY is down ~0.1%, ranges remain narrow with little follow through on moves.

• AUD is the strongest performer in the G-10 space at the margins, AUD/USD is ~0.2% firmer however we sit a touch below session highs. Technically AUD bears remain in the driver seat, support comes in at $0.6497 (low from Aug 8) and $0.6485 (low from Jun 1).
• Kiwi is ~0.1% firmer, gains briefly extended after 2-Year Inflation Expectations rose in Q3 however the move didn't follow through and we sit at $0.6075/80.
• Yen is firmer, however only marginally and a narrow range is persisting this morning. Bullish conditions remain intact, resistance comes in at ¥144.20 (high from Jul 7) and ¥145.07 (high from 30 Jun and bull trigger).
• Elsewhere in the G-10 space; EUR is up ~0.1% as is CHF. GBP is marginally lagging, sitting little changed from opening levels.
• Cross asset wise; e-minis are a touch firmer, the Hang Seng is little changed having pared an early ~0.6% loss. US Tsy Yields are little changed across the curve.
• The docket is thin on Wednesday, Thursday's US CPI print is the next macro risk event for G-10 FX.

OIL: Crude In Tight Range But Holding Onto Gains

Oil prices have been moving in a very narrow range during the APAC session but have held onto most of Tuesday’s gains. WTI is down 0.2% to $82.72/bbl, close to the intraday low of $82.68. Brent is also 0.2% lower at $86, which is providing support with moves below tending to be brief. The USD index is slightly lower.

• WTI is now up 1.1% in August so far and Brent +0.7%.
• Bloomberg reported API data showing a US inventory build of 4.1mn barrels in the latest week after the huge 15.4mn drawdown, according to people familiar with the data. The official EIA data print later today and last week printed at -17.05mn barrels.
• Risks to Russian crude shipments from tensions in the Black Sea remain after the Ukraine’s Zelensky said that it would choose its targets if Russia blocked Ukraine’s ports. The hostility around shipping has provided support to markets this week.
• The calendar is very quiet later with no data/events of note. The focus is on Thursday’s US CPI. OPEC+ and IEA reports are also released this week.

GOLD: Pressured By A Surging USD On Tuesday

Gold is up 0.3% in the Asia-Pac session, after closing 0.6% lower on Tuesday. USD strength proved to be a headwind for the precious metal, building on Monday's drop.

• On Tuesday, the US dollar experienced its most significant surge in almost five months, driven by apprehensions stemming from lacklustre Chinese economic data and uncertainties surrounding the US banking sector's condition.
• Moody's Investors Service's decision to downgrade 10 smaller and mid-sized American banks, along with the potential for similar actions on a few major institutions. That helped spur strength in the greenback, which typically moves in the opposite direction to bullion.
• The US tsy 10-year yield declined 7bp to around 4.02%. While lower yields would tend to support bullion, it is important to note that the 10-year yield remains some 20bp higher than month-ago levels.
• US CPI figures out on Thursday will be closely monitored.

RBI: MNI RBI Preview - August 2023: No Change, But Renewed Inflation Pressures In Focus

• The strong sell-side consensus and our own bias is that the RBI will hold steady on rates at tomorrow's policy announcement.
• The main focus is likely to rest on renewed inflation pressures, which to date have been driven by food-supply side issues. The RBI may well view such disruptions as temporary and better left to the government to deal with.
• Still, with a strong domestic economic backdrop, the central bank is likely to be wary of renewed/broader based price pressures, particularly with inflation rates coming off elevated levels. This should be enough, at the very least, to keep the central bank maintaining its 'withdrawal of accommodation stance'.
• Full preview here:

ASIA FX: USD/Asia Pairs Edge Down From Recent Highs, Led By USD/CNH

Most USD/Asia pairs sit away from recent highs, particularly in terms of USD/CNH, where defense of the yuan has stepped up today. Elsewhere USD losses are fairly modest at this stage, but for pairs like USD/THB and USD/PHP there seems a reluctance for higher levels in the near term. Taiwan inflation data is still to come today, while the main focus tomorrow will be on the RBI decision (no change expected). Q2 GDP in the Philippines is also out, while China July credit figures are due over the next few sessions.

• Spot USD/CNH was firmer in earlier trade but couldn't sustain momentum above 7.2400. The CNY fix was much stronger than expected, the fixing error re-widening to beyond -500pips. July inflation data was close to expected, but does suggest that the worst of the deflation impulse may be behind us. Reuters also reported that state banks were selling USDs onshore. Onshore equities are struggling for positive traction but are away from session lows. USD/CNH was last under 7.2200.
• 1 month USD/KRW is sits away from session highs, last in the 1315/16 region. Earlier we got close to Tuesday session highs around the 1320 level. The won has largely ignored the better onshore equity tone, although this appears to have been retail investor led, rather than by offshore investors. Earlier data showed a tick up in the unemployment rate to 2.8% from 2.6%.
• USD/HKD spot sits just off recent highs, last at 7.8150/55. Earlier highs were just above 7.8160. The recovery in the pair has continued, in line with broader USD trends. We are now back above the 20-day EMA (which is no longer declining). The 50-day sits higher, just under 7.8200. Early August lows sit back close to 7.7925. US-HK 3 month rate differentials are ticking higher, although more so due to a modest pull back in 3 month Hibor, which is back under 5.20%, against recent highs around 5.43% at the start of the month.
• The Ringgit printed its lowest level since mid-July yesterday, as July's gains continue to be trimmed. USD/MYR sits at 4.5775/4.5805, we sit ~1.7% firmer in August thus far after the 200-Day EMA (4.5053) provided support to the pair in late July. Industrial Production fell more than forecast in June, printing at -2.2% Y/Y. A print of -1.0% had been expected. Manufacturing Sales Value printed at -4.0% Y/Y. A reminder that the local docket is empty for the remainder of the week.
• The SGD NEER (per Goldman Sachs estimates) has firmed in early dealing this morning, the measure has ticked away from its lowest level since early July which was printed yesterday. We now sit ~0.6% below the top of the band. USD/SGD is ~0.1% lower on Wednesday, broader greenback trends are dominating flows today, the pair last prints at $1.3455/65. The pair is trimming some of yesterday's 0.5% gain. The local docket is empty until Friday when the final read of Q2 GDP is due. There is no estimate and the prior read was 0.3% Q/Q.
• Bank of Thailand governor Sethaput spoke today and his tone was similar to his comments in July which were followed by a 25bp rate hike. However today he didn’t reiterate that there was no need to end policy normalisation. Decisions will continue to focus on the outlook rather than individual data points but there is now a chance of a pause or another hike at the September 27 meeting. But now is not the time to start easing. Many economists expect that tightening is done this cycle given low inflation and growth uncertainties. USD/THB sits under 35.00, highs for the session have been marked at 35.07, with near term resistance around this point.
• USD/PHP sits below earlier highs. The pair opened above 56.40, but we now sit back near 56.29. This mirrors yesterday's session to some extent, as we got close to 56.40 before retracing during the early parts of Tuesday trade. The 56.40/45 region is right on previous YTD highs, so it appears to be somewhat of a resistance point in the near term. Agricultural output fell -1.30%y/y in Q2, versus +2.10% in Q1. Note tomorrow we get Q2 GDP, with the market consensus at +0.69% q/q (prior 1.1%) and +6.0% y/y (prior 6.4%). Earlier on the data front we had June unemployment tick higher to 4.5% from 4.3%.