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Weekly Market Outlook: Chinese and US CPI in the Highlights 

Weekly Market Outlook – This week, the US and China are set to release their July CPI data, expected to show contrasting trends. The US headline CPI is anticipated to increase after its peak in June 2022. Meanwhile, China’s CPI, which had been decelerating, is projected to turn negative in year-over-year comparison, after remaining unchanged at 1.8% in June from last year. 

Highlights of last week’s activities:    

  • Fitch downgrades US credit rating to AA+, marking the second-ever removal of triple-A status. Risk-off trade follows, Wall Street retreats, funds move to safe-havens, AUD/USD hits 8-week low. 
  • BOE raises rates by 25bp in a relatively dovish move, contrasting with earlier 50bp hike expectations. Policy now ‘restrictive’, terminal rate expectations lowered to 5.65% from 5.74%. 
  • RBA holds 4.1% interest rate for the second month, hinting at peak RBA rate. Consecutive negative retail trade quarters support this view. RBA’s quarterly SOMP downgrades GDP till 2024. CPI projected at 4.25% by December, trimmed mean CPI steady till 2025. 
  • Fed survey finds tighter credit, subdued loan demand in US banks, indicating rate-induced economic slowdown. 
  • China’s Q3 services PMI starts strong, solid rise in business activity. Outlook for next 12 months less optimistic. 
  • Japan’s 10-year yield at 9-year peak of 0.645%, BOJ allows JGB yield above 0.5%, intervenes due to rapid rise. 

What to watch on the Economic Calendar this week:  

* - Important    
Weekly Market Outlook: Chinese and US CPI in the Highlights 

Monday, August 07:     

  • AUD: Bank Holiday 
  • JPY: BOJ Summary of Opinions 
  • JPY: Leading Indicators 
  • CHF: Unemployment Rate 
  • GBP: Halifax HPI m/m 
  • CHF: Foreign Currency Reserves* 
  • CAD: Bank Holiday 
  • USD: FOMC Member Harker Speaks* 
  • USD: FOMC Member Bowman Speaks 

Tuesday, August 08:     

  • USD: Consumer Credit m/m 
  • GBP: BRC Retail Sales Monitor y/y 
  • AUD: NAB Business Confidence* 
  • CNY: Trade Balance 
  • JPY: 30-y Bond Auction 
  • CAD: Trade Balance 
  • USD: Trade Balance 
  • USD: IBD/TIPP Economic Optimism  

Wednesday, August 09:     

  • CNY: CPI y/y* 
  • CNY: PPI y/y* 
  • NZD: Inflation Expectations q/q* 
  • JPY: Prelim Machine Tool Orders y/y 
  • GBP: 10-y Bond Auction 
  • USD: Crude Oil Inventories 
  • USD: 10-y Bond Auction* 

Thursday, August 10:   

  • JPY: PPI y/y 
  • EUR: ECB Economic Bulletin 
  • CNY: New Loans* 
  • USD: Core CPI m/m* 
  • USD: Unemployment Claims* 
  • USD: 30-y Bond Auction 
  • USD: Federal Budget Balance 

Friday, August 11:

  • USD: FOMC Member Harker Speaks* 
  • NZD: BusinessNZ Manufacturing Index 
  • NZD: FPI m/m 
  • JPY: Bank Holiday 
  • GBP: GDP m/m* 
  • GBP: Prelim GDP q/q* 
  • USD: Core PPI m/m* 
  • USD: PPI m/m* 
  • USD: Prelim UoM Consumer Sentiment* 
  • USD: Prelim UoM Inflation Expectations* 

Don’t let important updates, upcoming events, announcements, and data releases pass you by. Stay in the loop with the Global Economic Calendar

Economic data highlights scheduled for August 7 week:  

The August 7 week will have minimal economic data impact with just two reports expected to influence markets. After July’s employment data, attention will shift to inflation metrics for monetary policy insight.  

Key among these is the July CPI, due at 8:30 ET on Thursday. The June data raised hopes of sustainable downward inflation, but July might disappoint, especially due to rising energy costs potentially lifting the all-items CPI year-over-year rate. If the core CPI doesn’t lower, a rate hike could be imminent by the September 19-20 FOMC meeting. Labor market data suggests little FOMC concern for maintaining maximum employment. 

July’s CPI report hints at 2024 Social Security cost-of-living-allowance; higher July-September inflation could lead to an above-average increase, though not matching 2023’s 8.7 percent rise. 

July’s final University of Michigan consumer sentiment index was 71.6, up from June’s 64.4 and the highest since October 2021. A further rise in August’s preliminary index, due Friday at 10:00 ET, indicates consumers overcoming inflation-related gloom. Confidence, though below pre-pandemic levels, improves with the labor market and rising wages. 

The University of Michigan’s survey also gauges inflation expectations. Gasoline price increases might lift 1-year inflation expectations, but the 5-year measure should stay around 3 percent. 

United States/USA: Inflation Challenges Ahead 

In the US, the recent improvement in inflation during the first half of 2023 is seen as the easy part, with challenges ahead in the second half. The July CPI report is anticipated to show a 0.2% increase, pushing the year-over-year rate to 3.2%-3.3%. This marks the first rise since June 2022. 

Dollar Reverses Early Gains following PCE

The US CPI grew at an annualized rate of 3.4% in H1 23 and 2.8% in H2 22. To maintain a declining trend in headline CPI, it needs to average less than 0.2% monthly. The core rate is different; a 0.2% increase would keep the year-over-year rate at 4.8% or slightly lower. The core rate grew at an annualized rate of 4.6% in H1 23 after a 5.0% pace in H2 22. Deflation appears in producer prices, with headline PPI slightly negative in H1 23 and up less than 1% in H2 22. However, the base effect could lead to a jump in the year-over-year rate in July.  

The Dollar Index tested a downtrend line from May and July highs but hasn't surpassed it, hovering around 101.75 with support near 101.60. Momentum indicators suggest a possible top soon, potentially after the US CPI report and assessing market response to increased Treasury supply. If a peak forms, a decline toward 100.50-80 might follow. The US deficit is expected to be 5.7% of GDP, possibly worsening if a long-anticipated recession occurs. 

China/CNY: Battling Deflation and Trade Surplus 

China is facing deflation amid global inflation concerns. The CPI has turned negative YoY, alongside negative PPI since Q3 22. The base effect is expected to gradually lift price pressures, signaling a possible turnaround. Strong lending figures, likely to be released soon, could be supported by additional monetary measures.  

Despite falling exports and imports YoY, China’s trade surplus has grown, reaching $68.1 bln in H1 2023 from $62.1 bln in H1 2022. The upcoming currency reserve report could reflect valuation shifts. The dollar’s value against other currencies dipped, potentially boosting PBOC’s reserves. The dollar clings to a trendline, starting near CNY7.19 and ending near CNY7.1780. The US 10-year premium over China surpassed 150 bp, the highest since 2007.  

The yuan's pressure might ease after the dollar's retreat from July highs, yet divergent CPI reports could hinder CNY appreciation. PBOC keeps the dollar's reference rate below expectations to moderate its ascent, possibly requiring a drop below CNY7.10 for confirmation of a peak. 

Japan/JPY: Focus on Demand and Trade 

The Bank of Japan’s key data focus is on demand, not just inflation. On August 8, June’s household spending figures will be released, likely showing a decline following May’s 4.0% YoY drop and April’s 4.4% decrease. This supports the BOJ’s stance on the need for accommodative monetary policy due to non-demand-driven price increases.  

Japan’s PPI has also fallen in 3 of the first 6 months, with a yearly decline of -1.6%. Wage growth might moderate. June’s current account data, known for a historical seasonal deterioration, will also be reported. The recent pattern shows deficits, with May’s surplus including a trade deficit. Notably, Japan hasn’t reported a monthly trade surplus since October 2021.  

The MOF portfolio flows will be watched for initial reactions to the Yield-Curve Control adjustment. The US rate pullback could ease pressure on JGBs. The dollar is near a four-day low, approaching JPY141.65, just below the (38.2%) retracement level of the pre-BOJ meeting rally in late July. If broken, JPY140.60-JPY141.00 is the next range. 

Eurozone/EUR: Germany’s Industrial Output Crucial 

This week’s economic calendar is relatively light, with the focus primarily on the Sentix surveys at an aggregate level. Notable reports include Germany and France revealing their June current account figures, along with Italy releasing its trade report.  

ECB Lifts Interest Rates to 23-year High, Euro Falls

Of particular significance is Germany’s upcoming industrial production data, which has steadied in April and May after notable fluctuations in Q1, encompassing construction activity as well. However, the recent downturn in June’s manufacturing and construction PMI, coupled with the lack of recovery in July, raises concerns about the potential for another decline in industrial output. The market sentiment has turned pessimistic, leading to a reduction in the probability of a September rate hike.  

Initially, above 70% shortly after the July ECB meeting, the likelihood has now diminished to around 37%. While the euro managed to close above the five-day moving average before the weekend, overcoming the barrier around $1.1050 is necessary to indicate more than mere consolidation. Nevertheless, it appears that the retracement from the year's peak, established on July 18 around $1.1275, has either concluded or is nearing its end, as it halted its decline just above the anticipated $1.09 threshold.

United Kingdom/GBP: BOE’s Rate Hike and Financial Oversight 

The Bank of England raised the base rate by 25 bp to 5.25% on August 3. The swaps market indicates an 85%+ chance of another 0.25% hike next month. Important upcoming data includes August 11 Q2 GDP, which likely reflects stagnation after a 0.1% Q1 expansion. New BOE forecasts project 0.5% growth this year, but GDP figures won’t strongly affect BOE policy. 

Key reports on August 15-16 are employment and CPI. China uses informal channels to guide markets, like reducing mortgage rates. US and UK similarly address real estate issues. UK’s Financial Conduct Authority criticized banks for not passing on rate increases, resulting in reduced mortgage rates from several banks.  

Sterling recovered from June lows to $1.2785 post-US jobs data, showing a potential momentum shift. The decline from the mid-July high (~$1.3140) likely ended; a rise above $1.2820 would confirm and target $1.2900-50. 

Australia/AUD: Inflation Expectations and RBA Policy

A few banks have upcoming consumer and business surveys listed on Bloomberg’s calendar, but their impact on the market is expected to be minimal.  

Of note is the Melbourne Institute’s monthly survey, which tracks consumer inflation expectations at a consistent 5.2% for the past three months and last year’s end. However, this alone is unlikely to shift the market’s view on the slim chance of an interest rate hike during Governor Lowe’s final meeting. It’s considered wiser from an institutional perspective to let his successor, perceived as somewhat dovish, establish goodwill. 

The Australian dollar recently hit a three-month low at around $0.6515 before rebounding close to $0.6600. While momentum indicators are declining, a rise beyond $0.6630, preferably $0.6660, would enhance the likelihood of a bottoming out. On the higher side, this could potentially drive a return toward $0.6750. 

 Canada/CAD: Trade Balance Concerns 

Canada’s recent merchandise trade balance is a notable point in an otherwise quiet data week, alongside June building permits. Despite an unexpected C$3.44 billion deficit in May, forecasts had anticipated a C$1.2 billion surplus.  

Before the pandemic, Canada experienced trade deficits, but by early 2021, monthly surpluses became more common, leading to its first 12-month rolling trade surplus since 2015 in November 2021. Yet, the trade balance had been worsening even before the significant deficit in May. In the initial four months of 2023, the average monthly surplus was about C$475 million, down from the C$2.6 billion average in the same period in 2022.  

The Canadian dollar, alongside the Australian dollar, exhibited weakness among G10 currencies recently. The US dollar, reaching around CAD1.3395, its highest in nearly two months, showed some volatility. Though it's uncertain if the greenback's peak has occurred, a move beyond CAD1.3400 could target the CAD1.3440-50 range, while a dip below CAD1.3300 might affirm a high in place. 

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Weekly Market Outlook: Chinese and US CPI in the Highlights 

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