Daily Market Analysis

Chinese Inflationary Data Again in Negative Territory

August 9, 2023

For the second time in a week, news from a ratings agency sent the markets into a tailspin. Moody’s downgraded the credit rating for an umber of US regional banks, and this followed on from the Fitch downgrade of the US credit rating last week. While neither of these events were welcome developments, by the same token they didn’t come out of the blue particularly after what we saw in terms of the regional banking crisis back in March.

Also, ratings agencies do have a track record of being a bit late to the party when it comes to things such as these (e.g., the GFC) so I don’t think the news from the ratings agencies themselves over the past week will necessarily have a lasting negative impact. What matters more will be how banks and other sectors perform over H2 and also how the Fed manages interest rate policy in the process.

The latest Chinese inflationary data did little to inspire confidence that an economic turnaround is forthcoming. The lack of both confidence and willingness to spend by the Chinese consumer was born out by the CPI and PPI numbers today which were again in negative territory. The July CPI print was slightly better than expected (at -0.3% verses -0.4% expected verses 0%prior, y/y), however July PPI was a miss (at -4.4% verses -4% expected verses -5.4%prior, y/y).

But overall, the inflation data released today was further evidence that China remains a cause for concern from a global growth perspective. The data was definitely not good, but was it bad enough to prompt any immediate new stimulus measures from Beijing? Based on the rather measured approach from Chinese authorities so far this year, perhaps not, though time will tell.

With the Chinese CPI coming in negative but marginally above what was expected, risk assets had a muted immediate reaction to the numbers. The Australian Dollar, which is usually a good barometer for reading the reaction to Chinese data, was stable around the US$0.6540 level after the release. The USD remains favored by currency traders at the moment as evidenced by the DXY trading back near the 102.50 level despite some weakness in US treasury yields.

Crude oil barely reacted to the Chinese inflation data which reflects the somewhat mixed nature of the numbers, with CPI slightly better than expected while PPI was worse. In the previous 24 hours, oil had travelled lower on the weak Chinese trade data before an upbeat outlook from the US EIA (Energy Information Administration) again propped up the price. Oil still looks well supported though shorter term some of the technical appear stretched and momentum has slowed compared to the rampant run higher in July

Meanwhile, gold is finding a rally had to come by in the face of the prevailing strength of the greenback. During Asian trading hours the gold price was trading around the US$1928 level and is trading below both the 100-and 50-day moving average. With safe haven flows remaining elusive, the precious metal will be relying on a dip in form from the USD if it is to mount a move to the upside.

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