China deflation and U.S. inflation dampen sentiment.
China deflation and U.S. inflation dampen sentiment.
Asian Markets Brace for Uncertainty: China’s Deflation Concerns and US-China Tensions
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Written by Jamie McGeever, Financial Markets Columnist
The day ahead in Asian markets promises a mix of caution and anticipation. Lingering concerns over China’s slide into deflation, coupled with the impending release of US inflation data, will likely keep markets in check. Meanwhile, investors are also keeping a close eye on India’s interest rate decision, wholesale inflation from Japan, and Philippine GDP data.
One factor that may come into play is renewed tension between the United States and China. The White House has recently detailed plans to prohibit some US investments in Chinese technology and require the government to be notified of other investments. This potential conflict is something that investors will be closely monitoring.
Despite Chinese stocks falling for the third consecutive day, the rest of Asia seemed to shrug off the Chinese deflation figures. The MSCI Asia ex-Japan index rose by 0.5% – its best performance this month. The -0.3% annual rate of deflation was not as dire as the expected -0.4%, which may have brought some relief to the region.
In a similar vein, a more benign reading of US inflation on Thursday could help lift some of the gloom that has descended upon markets since Fitch downgraded the United States’ credit rating on August 1. Wall Street has experienced a lackluster performance, with the S&P 500 falling for the sixth session out of seven. The upcoming release of the July inflation report is expected to show an increase in the annual rate of consumer price rises to 3.3% from 3.0%.
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While these factors will undoubtedly influence the direction of Asian markets, it is important to keep an eye on oil prices. Crude futures are at their highest level since January and are only down 9% from a year ago. This mitigates the deflationary impulse significantly, especially when compared to the 40% year-on-year decline seen as recently as June.
Another key factor to consider is the annual rate of Japanese wholesale price inflation. It is projected to have fallen to 3.5% in July from 4.1% in June. If this forecast proves accurate, it would mark the lowest figure since March 2021, indicating a consistent downward trend since the peak of 10.2% in December.
The Reserve Bank of India’s decision on interest rates is expected to garner substantial attention. While the market forecasts that the repo rate will remain steady at 6.50%, analysts anticipate a far more hawkish tone from the central bank. Recent food price increases have been sharper and longer-lasting than expected, leading interest rate markets to price in a decent chance of a quarter-point hike, potentially by the end of the year. However, currency traders appear less optimistic, as the rupee heads into the meeting fluctuating near October’s record low of around 83 per dollar.
Thursday’s key developments that hold the potential to offer more direction to markets include India’s interest rate decision, Japan’s wholesale price inflation for July, and the release of the Philippine GDP data for Q2.
In summary, Asian markets are facing a mixture of concerns and potential catalysts. Despite China’s deflation worries and US-China tensions, there is some optimism regarding the performance of the MSCI Asia ex-Japan index. A more favorable US inflation reading and the current status of oil prices are also factors to watch. Market participants are eagerly awaiting India’s interest rate decision and monitoring Japan’s wholesale price inflation figures and the Philippine GDP data. These developments will provide further clarity and help shape the direction of Asian markets in the near term.
