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China deflation

 

Flat Start 

Stocks were out of the gates with flat feet on Monday after some soft Chinese inflation numbers, with the major indices nurdling around the flat line in early trading. After a rough few days last week the FTSE 100 trades at its weakest since March, while the DAX is similarly tracking around the weakest it’s been in more than three months. Asian shares were mixed overnight, Wall Street closed Friday in the red. It follows the US jobs report on Friday which maybe wasn’t as hot as expected but nevertheless underscored the relative strength in the labour market and in wage growth, and the need for the Fed to keep going.  

 

China Deflation 

China’s producer prices fell by 5.4%, the fastest decline in more than seven years and an acceleration from the 4.6% dip in May. Chinese factory gate prices are considered an important leading indicator for global consumer prices. On that front, China’s CPI also declined 0.2% on the month to leave the annual level flat – signs of deflation should be positive, but the worry is demand – be it globally or domestically - is not as strong has hoped for. This soft data would tend to suggest the central bank will cut rates again and could see further stimulus from Beijing….goods deflation is not going to really help solve the sticky services inflation we are dealing with here.  

 

Geopolitical Focus 

Meanwhile, US Treasury Secretary Yellen said she had a "constructive visit" to China and that she "made clear that the United States is not seeking to decouple from China". On the other side, China called for “practical action” on sanctions. Geopolitics is in focus with the Nato summit and what sort of line in taken with Ukraine in terms of membership.  

 

US CPI 

The key macro data this week is the US June CPI inflation report on Wednesday, which is followed by a 10yr Treasury auction to test the appetite of bond investors. Disinflation is evident in the headline number, dipping from 4.9% to 4.0% in May, but core inflation remained stickier at 5.3%. The Reserve Bank of New Zealand (likely a pause) and Bank of Canada (probably a 2nd straight hike) are in action this week, too. 

 

Steepening 

Yields were on the move in the wake of the jobs report, with the 2yr sharply back through 5%, and we are seeing an acceleration in the re-steepening of the curve – or rather it is becoming a lot less inverted. This is something that investors are not that well positioned for and it could be a big recession signal. From being inverted 110bps a week ago the 2s10s inversion is now 86bps. This is moving with a softer dollar in the wake of the NFP headline miss, with DXY futures down to the weakest in more than two weeks. And there was a big move in JPY on Friday. 


 

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