Asia bets on China stimulus

Mainland China stocks are leading the way higher today after China’s Inflation data showed a still very benign inflation landscape. Inflation YoY in April climbed to 2.10% (1.8% exp), and Inflation MoM for April increased by 0.40% (0.20% expected). PPI also eased to 8.0% from 8.30% last month. In the context of the inflation landscape elsewhere in the world, China is in a very sweet spot at the moment, markets today are pricing that it gives China’s government room to unleash some juicy stimulus GFC-style.

Of course, what the market wants, and what the market gets are often two different things, especially where the Chinese government are concerned. Premier Li continues to make noises about the potential for broader economic support, but with China still hell-bent on covid-zero, even if it crushes the economy, and the PBOC showing no signs of loosening the liquidity tap, along with the continuing rhetoric of “targeted stimulus,” I’m not seeing any signs, yet that China has moved away from its deleveraging stance. Even opening the taps now would be of limited impact if workers can’t leave lockdown to build roads or go back to factories.

That sort of mixed messaging doesn’t do markets any favours, but China isn’t the only one guilty of it. The rent-a-crowd of daily Fed speakers are also a bit “mixed.” We saw some big ranges in stocks and bonds overnight as increasingly frantic markets chase their tails in the vice grip of recessions and Fed hiking/inflation. The Fed’s Loretta Mester, on Bloomberg television, didn’t help things by saying “we don’t rule out 75 forever,” meaning 75 bps hikes could happen. ​ US longer-dated yields fell quite heavily overnight as the street tentatively priced in “peak-hiking,” but the more rate-sensitive 2-year was unchanged. This kind of mixed messaging isn’t at all helpful and may be why equities gave back some gains overnight.

The US National Federation of Independent Business (NFIB) survey overnight suggests US inflation isn’t going to fall precipitously soon. The price change and 3-month pricing plan sub-indices were as robust as ever, suggesting cost increases, and the ability to pass them on to consumers is as robust as ever. That isn’t stopping the US federal government, now looking nervously at mid-terms in November, from trying to do something about inflation as diesel and gasoline prices soar. President Biden has hinted a temporary suspension of Federal fuel taxes could be on the cards, and he is actively exploring removing the Trump-era tariffs on Chinese goods to push the CPI lower. That has given US equity futures a leg up today. However, even if we may be nearing the top of inflation, that doesn’t mean it will suddenly drop; it could just as easily move sideways at the levels globally for some time.

One risk factor constantly being ignored when it shouldn’t be is the Ukraine war. Ukraine has announced the suspension of west-bound gas exports through a compressor hub, ostensibly because Russia is siphoning the gas to its vassals in Donetsk. It is trying to redirect flows to another interchange that remains under Ukrainian control. Naturally, Gazprom disagrees, but the threat of disruption to European gas supplies appears to be pushing oil sharply higher in Asia today, helped along by stimulus hopes from China. All bets are off on inflation if Russian gas gets cut to Europe.

New Zealand has announced today that it will fully reopen borders in about six years, I mean weeks’ time on July 1st. The New Zealand dollar is 0.25% higher, but that is due to a modest risk-sentiment recovery. Like everything to do with the Covid recovery by the government and the Reserve Blank, it is too little, too late. AUD/NZD above 1.1000 might encourage some Australian skiers to venture across the Tasman Sea for the winter season, but they’ll be shocked at how many New Zealand pesos will be required to buy anything. New Zealand remains my no.1 pick for a hard landing later this year among developed countries unless Russian gas gets turned off to Europe.

Another central bank on a growing list having to make least-worst choices is Bank Negara Malaysia today. The Malaysian Ringgit has performed terribly these past two months, showing none of the resource-based support that the Indonesian rupiah had achieved. In that respect, the ringgit appears to have become a China-proxy like the Australian dollar. Headline inflation is still quite manageable at 2.20%, but food price inflation is heading above 4.0%. That reduces the pressure on BNM to hike rates today, but like the RBI last week, and Indonesia next month, they will likely have to move soon unless they want to start burning through foreign reserves to defend the currency. Malaysia encapsulates the least-worst choices facing many an Asian central bank as 2022 goes on, especially as China’s PBOC seems quite happy to allow the yuan to continue depreciating in a back-door stimulus for exporters.

All eyes on US inflation

The evening’s highlight will be the US Inflation data. April Core Inflation YOY is expected to ease from 6.50% to 6.0%, with Headline Inflation YoY expected to ease to a still-eye-watering 8.10%. Expect a binary outcome from the data. Lower prints will see peak-Fed hiking priced in, good for equities and bonds, bad for the US dollar. Stubbornly high prints see more Fed tightening. Bad for equities and bonds, but good for the US dollar.

Keep an eye on official US Crude Inventory data as well, particularly the refined gasoline and distillates categories. The US has plenty of oil but seems to be struggling to refine it into diesel, like the rest of the world. We could see a sharp move higher by WTI if the sub-category’s inventories fall sharply, and it will be another headwind for equities as well.

Finally, cryptos have a volatile session, bitcoin had an impressive rally intraday before losing much of those gains to finish 3.0% higher at USD 31,000.00. Bitcoin failed just ahead of resistance at USD 33,000.00 overnight, a bearish technical development. Failure of USD 30,000.00 likely signals the next wave down for bitcoin which should target USD 17,000.00 in the week (or days) ahead. I am watching the (un)stable coin situation, with 1 to 1 to the US dollar pegs breaking in the space. I have warned before that so-called stable coins made me nervous due to the opacity of whether they actually have one US dollar in reserves for every (un)stable coin issued. Turmoil here could result in more downward pressure in the cryptocurrency space.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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