Inflation in China starts the week with a bang

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from financial markets columnist Jamie McGeever.

A series of key economic data releases showing whether China begins to emerge from its post-lockdown funk, and monetary policy decisions – and more importantly, guidance – from New Zealand and South Korea will be the key regional drivers of Asian markets this week.

These are accompanied by a slight but potentially significant deterioration in risk appetite as investors grapple with even higher global borrowing costs – notably US and UK bond yields – and tensions trade between the United States and China.

The second-quarter earnings season in the US is also kicking into high gear, with the tone likely to be set later in the week when some of Wall Street’s biggest names report.

Asian markets, however, continue to underperform. The broad MSCI Asia ex-Japan index lost 1.5% last week, its third straight week without a rise, and is flat for the year. The MSCI World index is up 11% since the start of the year.

Much of this is due to sluggishness in Chinese markets, and key indicators for the region’s largest economy on Monday will kick off the week of trading.

Annual consumer price inflation in June is expected to remain at just 0.2%, with the monthly rate standing at 0% from -0.2% in May. As recently as January, annual CPI inflation was above 2%.

Price pressures are expected to remain entrenched in deflation over the coming months. Annual producer price inflation, already the most negative since 2016, is expected to fall to -5.0% from -4.6% in May.

These figures show the task that the central bank and the Chinese government are facing to revive the economy. With deflation setting in and growth slowing, it’s no surprise that Chinese stocks, bonds and the currency are under pressure.

Chinese banking stocks, as measured by the Hong Kong-listed Hang Seng Mainland Banks Index, plunged 10.5% last week. It was the index’s biggest drop in five years and the third since its launch in 2011.

Reflecting how poorly China’s post-lockdown economy has fared relative to consensus forecasts, Citi’s China Economic Surprise Index has now fallen 11 weeks in a row. This is the longest period of underperformance since 2010.

US Treasury Secretary Janet Yellen’s four-day visit to China concluded on Sunday with no obvious thaw in relations between the two superpowers. Yellen said his talks with Chinese officials were “direct” and “productive” but had “significant disagreements.”

Other key regional economic data points and policy decisions this week for investors include: rate decisions in New Zealand and South Korea; Chinese lending and trade figures; Indian inflation; Singapore Second Quarter GDP Report.

Here are the key developments that could provide more direction to markets on Monday:

– China CPI, PPI inflation (June)

– Japan Current Account (May)

– Fed’s Barr, Daly, Mester and Bostic all talk

(By Jamie McGeever; Editing by Diane Craft)

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