Chinese inflation figures due for release on Thursday could heighten the deflationary concerns for the world’s second largest economy. The October CPI and PPI prints are both expected to be in negative territory (CPI is forecast to be -0.1% versus a flat reading in September, while PPI is expected to be -2.7% compared to -2.5% in the prior month) which would highlight the plight of policymakers in Beijing in trying to ‘right the ship’. This would follow the dismal PMI data last week which was in the contractionary sub-50 level for the Manufacturing sector.
Meanwhile, the latest trade balance figures for China told a diverging story, with October imports rising 3% (versus an expected 4.8%decline), while exports dropped 6.4% (greater than the 3.3% drop expected). The better imports figure indicates some hope that the long struggling consumer sector could be on the verge of finding its feet again, though the export data continues to paint a bleak picture. Overall, the trade balance figures speak to the uneven nature of Chinese growth during the post pandemic reopening.
This is part of the reason why foreign investors remain underweight on Chinese investments, and if the CPI and PPI figures raise new concerns about deflationary forces, investors will likely remain hesitant to shift investments back into Chinese assets at this stage of proceedings, until such time as evidence of economic stability arises. Let’s see how the inflation figures pan out this week.
Elsewhere, the RBA delivered on its ‘low tolerance’ mantra by hiking rates 25bps in response to a surge in Q3 CPI. Australian rates are now at a 12-year high of 4.35%, however the central bank dampened expectations of further hikes via the tone and language used in the accompanying statement. As such, the AUDUSD failed to get a boost from rate hike, with the Aussie Dollar losing ground and sliding below 0.6450.
Despite a pullback in treasury yields, gold has drifted lower overnight with safe haven buying of the precious metal starting to wane. During Asian trading hours, spot gold was hovering around the US$1970level, with a further decline in bond yields likely required to spur gold back n the direction of the $2k level in the absence of a pick-up in risk aversion.
After falling 6% last week, oil remains pressured despite the extension of Saudi Arabian and Russian production cuts until year-end. The question now is how far into 2024 could these cuts continue by these OPEC+ heavyweights in order to shore up the price. With no evidence of imminent supply disruptions due to the Israel-Hamas conflict, some of the risk premium from recent weeks is being taken out of the oil price. This has resulted in the WTI contract slipping below the $80 per barrel level. With the price sliding, investors will be on the lookout for any rhetoric from OPEC+ as the conglomerate of oil producers will likely not be too comfortable if the price continues to drift back towards the $70 level.
Equities in the US have been on a nice winning streak, though traders will be watching to see what tone is struck by the Fed Chairman Jerome Powell, who has two speaking engagements to come this week. Any resumption in the upwards direction of bond yields could upset the mood of equity markets, which is why close attention will be paid to The Fed Chairman’s language, with the FOMC having vowed to stay vigilant on inflation. As such, bond yields could remain a potential obstacle for equity market gains.