PBOC cuts reserve requirements after easing inflation measures
Overview: Capital markets are coming to an end in what has been a difficult week as the stock markets slide and the dollar and bonds rally. The MSCI Asia Pacific fell for the fourth session in a row, but the most interesting story might be the intrasessional upturn which could set the stage for a better performance next week. The Nikkei widened and rallied around 2%, while remaining closed (0.65%) lower. Likewise, the Shanghai Composite hit new session highs after falling more than 1.1% at the opening and closing less than 0.1%. South Korea and Taiwan indices fell just over 1% and still closed near session highs. Europe’s Dow Jones Stoxx 600 is up around 0.8% around noon in Europe to narrow this week’s decline to around 0.25%. That said, this is the first consecutive weekly loss since April. US futures point to a slightly higher open. The US 10-year benchmark yield is up about four basis points to 1.34%. If it holds, it would be the first rate hike since June 25, when it stood at just under 1.53%. European bond yields are edging up, but not before the German 10-year rate hits a new three-month low (minus 31bp). The dollar is today mainly weaker against the major currencies. The Norwegian krone and the Australian dollar are leading the way. The yen is the weakest major currency today, sliding around 0.3% to reduce this week’s gain to around 0.9%, leading the major currencies. The krona and dollar block currencies are the worst performers this week, all over 1%. Among emerging markets, freely accessible currencies do the best, led by South Africa, Hungary and Russia. Over the week, the three Latam currencies (Brazil, Colombia and Chile) were the worst performing, losing 2.3% -3.8% today. The JP Morgan Emerging Markets Currency Index posted a slight gain today to snap a four-day decline. It’s down around 1.2% so far this week, and it’s the fourth losing week in the past five. Gold is firm just above $ 1,800 after posting a six-day advance yesterday. Oil finds a better foundation. The August WTI is close to $ 74 after recovering yesterday from a three-week low to near $ 70.75.
Consumer prices in China rose 1.1% in June, slightly less than expected, and followed a 1.3% year-on-year increase in May. Pork prices, down 36.5% year-on-year, fell nearly a percentage point in its CPI measurements. There appears to have been a slight rebound in pork prices late last month, and officials expect prices to stabilize in the second half of the year. Food prices generally fell by 1.7% (+ 0.3% in May), and non-food prices increased by a similar magnitude (1.6% in May). Fuel prices are higher, but the core CPI, without food or energy, rose 0.9% year-on-year (0.9% in May). Producer prices rose 8.8% year-on-year (9.0% in May). Producer price increases are expected to peak, and officials have reported new sales of some industrial metals from its strategic stocks. The lower inflation readings, coupled with the slippage in PMI reports, are boosting officials’ signal that it is ready to provide more monetary support. After the continental markets closed, the PBOC announced a 50bp cut in the reserve requirement ratio. He is seen releasing around CNY 1 trillion.
China also reported an increase in lending in June, led by the shadow banking system. Consider that new yuan bank loans increased by CNY 2.12 trillion, more than a third more than the CNY 1.5 trillion in May. Overall funding, which includes non-bank loans and bank wealth management branches, jumped to CNY 3.67 trillion from CNY 1.9 trillion in May. While new yuan loans exceeded expectations of CNY 270 billion, the increase in overall funding was CNY 780 billion above the median forecast of the Bloomberg survey.
The BOJ is meeting next week. With Tokyo in a new formal state of emergency, it wouldn’t be surprising to see it lower its growth forecasts. The BOJ is also expected to provide general details of a new loan facility to encourage more environmentally friendly investments. The BoJ is unlikely to take any new initiatives to revive the economy, which likely contracted in the quarter just ended. Talk emerged this week from a new supplementary budget after the Olympics.
The dollar found support yesterday near JPY 109.50 and moved back above JPY 110.00 today. An option there for $ 630 million expires Monday. Initial resistance is seen near JPY110.35. The dollar’s four-week advance is coming to an end, and near JPY 110.10, the greenback is down about 0.85%, which would be the biggest weekly loss since early April. The fall in the Australian dollar extended to nearly $ 0.7400 today, where the lower Bollinger Band is. Recall that Tuesday is tested $ 0.7600. A move now above $ 0.7460 would help stabilize the tone and provide a better basis for a rally next week. The Chinese yuan strengthened slightly today before the reserve rate was reduced. It alternated gains and losses this week but net-net, fell for the sixth consecutive week. The PBOC set the benchmark dollar rate at CNY6.4755, in line with expectations (CNY6.4760).
UK GDP in May rose 0.8%, about half of what the Bloomberg survey’s median forecast predicted, and adding insult to injury, April’s growth was pulled back at 2.0% against 2.3%. Industrial production fell short of expectations, increasing only 0.8% (not 1.4% as expected), and manufacturing output actually fell (0.1%) although April’s decline (0.3%) has been revised. Construction disappointed (-0.8% against 1.0% expected). April’s 2.0% drop was revised to just -0.7%. The services were a big lack. Instead of increasing 1.6%, they grew 0.9% more modestly, and April’s 3.4% increase was reduced to 2.8%.
A new front in post-Brexit tension between the UK and the EU has opened. The EU estimates that the UK owes it € 47.5 billion for its outstanding commitments to EU programs it continues to benefit from and other obligations, including pensions. In 2018, the UK estimated bonds would approach € 41.4 billion. The EU expects a payment of 6.8 billion euros this year.
Inflation in Norway is at high levels, and today’s report leaves Norges Bank on track to raise rates later this quarter. The headline CPI is 2.9% above year-ago levels, down from 2.7% in May. The underlying measure, which takes into account tax changes and excludes energy, fell from 1.5% to 1.4%. Producer prices jumped 4.6% month over month for a 37.1% year-over-year increase, including oil prices.
The euro sits in a quarter-cent range below $ 1.1850, where an option of around € 915 million expires today. Another option expires at $ 1.1800 for 1.26 billion euros. The euro is struggling to support even modest increases. It stood at $ 1.1845 yesterday and $ 1.1865 a week ago. Barring a stronger recovery in North America, this will be the fifth losing week in the last six. The British pound is also in a narrow range below $ 1.38. Without further gains, this will be the first session since April 13 that the British pound would not have traded above $ 1.38. The British pound settled last week at close to $ 1.3825. It has also declined in five of the past six weeks.
The US Economic Calendar presents the final wholesale inventory report for May. It is not a market driver, even at the best of times. Washington is expected to announce sanctions against ten new Chinese companies for human rights violations in Xinjiang. On another front, G20 finance ministers are expected to endorse global tax reform proposals, all of the details of which have not been worked out. There are at least three hurdles to overcome. The first is how to redistribute tax revenues from larger corporations, which seems likely to help other high-income countries more than developing economies. The second obstacle is the European and Canadian digital tax, which the United States opposes. Third, it is uncertain whether the tax reform can be passed by the US Senate.
The data on employment in Canada for June is in the foreground. Remember that Canada lost jobs in April and May. A recovery is likely in June and the median forecast is 175,000 jobs, which would drop the unemployment rate to 7.8% from 8.2%. Today’s report is seen as the key to next week’s Bank of Canada meeting. In April, the Bank of Canada announced it was cutting its bond purchases and forecasting the output gap to close in H2-22, suggesting it could make its first rate hike around that date. . A strong rebound in the labor market would likely allow the central bank to maintain its outlook and continue to slow in the third quarter.
The Canadian dollar is one of the worst performing major currencies this week, falling about 1.5% against the dollar. The greenback moved slightly above CAD1.2320 last week. Despite a slightly heavier tone today, the US dollar is holding above CAD 1.2500, where an option of almost $ 520 million will be launched today. A break below CAD1.2475 today would leave the greenback vulnerable to further pullback next week. The US dollar is near a three-day low against the Mexican peso (~ 19.92 MXN). Yesterday’s firm CPI reading keeps the market leaning towards higher follow-up rates in August (after the surprise 25bp hike last month). The next dollar support area is in the MXN19.70-MXN19.75 area. Brazil’s CPI climbed to 8.35% from 8.06%. He signaled his intention to raise rates again. As of today, the Brazilian real has fallen for eight consecutive sessions for a cumulative decline of around 6.3% and pushes it to its lowest level since late May. The Dollar will start today above its upper Bollinger Band (~ 5.24 BRL) and looks vulnerable to a pullback.