Macro Notes
In today's notes we discuss the ongoing deflation threat in China, higher inflation outcomes in Australia and Canada, and some thoughts on the Dollar ahead of tomorrow's US pce number.
China worries
Chinese stocks are down 7% from the highs with the market now having traded through key technical support at 3,000. Annual Cpi is stabilizing just above 0%, with monthly price momentum proving to be insufficient to push China firmly out of deflationary territory
This is despite a weakening currency which has pushed past the key level of 7.30. The next clear level on the charts is now 7.3450.
A managed depreciation by Chinese authorities seems to be in place and this is necessary in my opinion if we are to avoid inflation heading back below zero.
Swaps rates and government rates are all falling in tandem with local asset markets, inflation and the currency which put China again firmly in deflation watch unless the authorities once again respond with new stimulus measures which is unlikely ahead of the third “plenum” set for July the 15th.
For now, I have stopped out of my synthetic long position in Chinese equities as the technical stop loss level was breached and I am waiting to receive new information about future economic plans from the Chinese authorities.
Global Inflation whipsaw
Both Canadian and Australian Cpi data for the month of May have come out this week significantly stronger than market expectations.
This has pushed up bond yields across the curve in those currencies with knock on effects in other Government bond markets as well as the market braces for tomorrow’s US Pce number. Shelter, travel and food costs were all drivers of the upward momentum in May prices and I am keen to see if a similar effect is seen in the US number tomorrow. I was fairly relaxed about tomorrow’s US number but market forecasts seem low at +0.1%mom and global inflationary pressures are picking back up as the price of Crude Oil is also continuing to creep higher, threatening to break up towards $85.00/barrel with both Gasoline and Natgas also experiencing recent upward price momentum.
The Dollar
Technically, key dollar proxy FX pairs such as Usd/Jpy and Usd/Cnh have both recently taken out psychological levels at 160 and 7.30 respectively.
The chart of Gold also looks to be forming a head and shoulders pattern which could end up resolving bearishly if tomorrow’s US Pce number comes in higher than expected.
While the Fed was dovish the last few months, higher Cpi prints were bullish for Gold as the market hoarded inflation hedges, but now that the Fed has seemingly re-affirmed its commitment to 2% inflation, a higher Cpi print tomorrow will result in a parallel shift higher in the US yield curve and I think push gold lower all else being equal. I typically don’t like to see the USD rally in response to higher inflation numbers, especially when recent housing data is softening but the technical setup at the moment seems quite compelling for a bullish dollar move from here, especially if Gold confirms the break lower and the Yen and the Chinese Yuan continue to weaken from current levels.
Despite slightly weaker data and a more hawkish Fed, US equities seem to have no trouble attracting flows and this should in the short term also maintain upward pressure the dollar.
All eyes now on tomorrow’s inflation data, let’s see what happens.
As always, I’ll keep you posted.
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Disclaimer
The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.
It seems to me that Xi is caught in a vice between his desire to demonstrate the CNY is a stable currency and a viable alternative to the dollar and his need for the CNY to weaken to support the ongoing slowdown in the economy. it will be interesting to see how much pain he can withstand before allowing it to weaken further