China Inflation Stalls As US Speeds, Adding To Pressure On Yuan

Economic

Summary:

Numbers suggest holiday-season momentum is fading away.Weak domestic demand may add fuel to calls for stimulus。

China’s consumer prices barely increased from a year earlier and industrial prices continued to slump, underscoring the deflationary pressures that remain a key threat to the economy’s recovery.

The consumer price index rose 0.1% in March from the prior year, the National Bureau of Statistics reported on Thursday. The median forecast of economists in a Bloomberg survey was a 0.4% gain. The inflation rate dropped from 0.7% in February, when it had climbed above zero for the first time in six months during the Lunar New Year holiday. Producer prices fell for an 18th straight month.

The price slowdown suggests China may not get much help from local shoppers to meet growth targets that increasingly rely on selling its manufactured goods abroad. What’s more, with US inflation moving in the opposite direction, there’s a risk of an enduring interest-rate gap between the world’s two biggest economies that could add downward pressure on the yuan. China Inflation Stalls As US Speeds, Adding To Pressure On Yuan_1

China Inflation Stalls As US Speeds, Adding To Pressure On Yuan_1

“The price data clearly mirrors the weak domestic demand,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “The recent improvement in momentum is primarily export-driven.”

Before China’s CPI numbers came out, the central bank signaled continued support for the currency, after the offshore yuan weakened by the most in three weeks overnight on the US inflation surprise. It set its daily reference rate at 7.0968 per dollar, exceeding forecasts by the most on record. A gauge of Chinese stocks listed in Hong Kong dropped as much as 1.8% early Thursday, before paring some losses.

Higher inflation during the February holiday season, along with a tourism revival, had raised hope that Chinese households might be rediscovering their appetite to spend. Absent that, the country’s ability to hit its economic growth target of around 5% this year depends on overseas demand. Buoyant exports and factory activity data in recent weeks encouraged Goldman Sachs Group Inc. and Morgan Stanley to raise their growth forecasts this week.

The slowdown in consumer inflation was due to “waning consumption demand in March seasonally after the holiday while market supply was generally sufficient,” said NBS analyst Dong Lijuan in a statement accompanying the release of the figures.

Food price drops pulled the headline CPI number down by 0.5 percentage point, and the year-on-year increase in tourism prices slowed to 6% from 23% in February. Household appliances, and a transportation index that includes cars, extended a slide that’s lasted for more than a year. The government this week announced action plans to boost demand by offering subsidies for households that trade in older machines for new, greener models.

With the housing-market slump showing no signs of a turnaround, subdued demand for building materials like steel is dragging producer prices down. The overall index declined 2.8%, extending the longest falling streak since 2016. Metal smelting and pressing costs fell at an annual rate of 7.2%, while mining and washing of coal — used for steelmaking — tumbled 15%, the most among all main industries.

Fading inflation may still ramp up pressure on China’s government to offer more support for the economy. Falling prices squeeze companies’ profit margins, discouraging them from investment, and there’s a risk consumers could become even more reluctant to spend in anticipation that goods will be cheaper in the future.

“Monetary policy will likely remain loose,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. But he pointed to a constraint for Chinese central bankers: higher-than-expected US inflation could delay easing by the Federal Reserve. That would make it harder for China to trim its own rates — even though it needs to — due to concern about further weakening of the yuan, Pang said.

China Inflation Stalls As US Speeds, Adding To Pressure On Yuan_2

In a sign that deflation could continue to haunt the economy in the coming months, price competition in some industries has intensified lately. Companies that produce materials for construction, like zinc smelters, have been forced to lower their charges because of excess capacity while electric-car producers are offering aggressive discounts to lure customers.

Core inflation, which strips out volatile food and energy prices, slowed to 0.6% last month from 1.2% in February, according to the NBS.

Source：Bloomberg

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Ukadike Micheal

Economic

Bond

Bond traders are bracing for the possibility of 10-year US Treasury yields surpassing 5% amid growing speculation that the Federal Reserve may refrain from cutting rates this year. Schroders Plc is actively shorting US bonds across various maturities, anticipating sustained upward pressure on rates due to persistent inflation. Pacific Investment Management Co. also anticipates a more gradual pace of policy easing by the Fed compared to other developed markets, with a significant chance that no rate cuts will occur this year.

This shift in sentiment marks a swift change from previous expectations, where many anticipated multiple rate cuts starting as early as March. The recent bullishness among bond bears has been further fueled by strong US economic data, which exceeded expectations for the third consecutive month.

Kellie Wood, deputy head of fixed income at Schroders in Sydney, believes that 10-year yields reaching 5% or higher is a plausible scenario. Schroders is positioning for the potential scenario of the Fed refraining from rate cuts throughout the year, holding bearish positions on US two-, five-, and 10-year bonds. Despite the recent surge in yields, 10-year US bond yields remained relatively stable in Asian trading after surpassing 4.5% for the first time since November in the previous session.

As investors reassess their rate cut expectations in response to solid US economic data, swap traders have adjusted their forecasts, pushing back the timing of the first expected rate reduction. This shift reflects a growing need among investors to hedge against the possibility of the Fed maintaining its current policy stance amidst renewed inflation concerns.

Ben Emons, senior portfolio manager at Newedge Wealth, highlights the potential for 10-year yields to fully retrace to pre-financial crisis levels, reaching around 5.30%. This outlook underscores the significant upward pressure on yields driven by evolving inflation dynamics and shifting market expectations regarding Fed policy.

Abrdn Plc is also adjusting its bond portfolio duration, anticipating a "more resilient growth backdrop" and the potential for higher yields. Duration reduction strategies aim to mitigate the impact of rising interest rates on bond prices, reflecting a broader trend among investors to adapt to evolving market conditions.

The evolving outlook for US Treasury yields reflects a complex interplay of factors, including inflation dynamics, economic data, and central bank policy expectations. Bond traders are adjusting their strategies in response to shifting market dynamics, highlighting the importance of flexibility and proactive risk management in navigating the current environment.

Source: Bloomberg

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Warren Takunda

Traders' Opinions

Economic

Forex

Stocks and the euro were steady ahead of an European Central Bank meeting on Thursday, after stubborn U.S. inflation numbers triggered the biggest global market selloff in months and left Japan's yen at a new 34-year low.

Euro traders were feeling especially fragile after Wednesday's surprise U.S. CPI figures sent the dollar on its biggest tear in over a year against the single currency by quashing hopes of near-term Fed rate cut.

Europe's bourses had opened broadly flat in line with MSCI's main global index , opens new tab, with focus on whether ECB chief Christine Lagarde bolsters expectations later that it will start cutting rates in June, thereby opening up a serious wedge with the Fed.

Bond markets were still reeling, meanwhile, after the 10-year U.S. Treasury yield - the main driver of global borrowing costs - had shot back above 4.5%, its biggest daily leap since September 2022. /US

Germany's 10-year bond yield - the European benchmark - was up fractionally at 2.45%, after rising 6 bps on Wednesday although that was a small change compared to the 18 bps jump experienced by Treasury traders.

"The key driver now remains U.S. rates," Amundi's Co-Head of Emerging Markets/Fixed Income Sergei Strigo said, pointing to Treasuries braking up through the 4.5% level again.

"The question is whether we are going to stick to these levels or are going to go higher".

For ECB watchers, the bank has kept rates steady since September but has already signalled that cuts are coming into view, with policymakers awaiting a few more comforting wage indicators before pulling the trigger.

The currency bloc is now in its sixth straight quarter of economic stagnation and the labour market is starting to soften, an obvious contrast to the U.S. economy which continues to grow robustly.

"While there are limits to how much ECB policy can diverge from the Fed over time, there is nothing to stop the ECB from cutting first or setting its own pace of cuts early on in the easing cycle," Deutsche Bank's Jim Reid said.

However he also pointed to how markets cut the likelihood of an ECB cut by June back to 82% on Wednesday, down from 91% the previous day. Likewise at the Bank of England, it fell from 74% to 56%, for the Bank of Canada it fell from 78% to 53%, and for the Reserve Bank of Australia it went from 25% to 21%. Europe turns to ECB after U.S. inflation selloff_1

Europe turns to ECB after U.S. inflation selloff_1

Reuters Graphics

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U.S. stock futures , were little changed after Wall Street had fallen around 1%. Treasuries also steadied after the surge in yields had pushed them to their highest levels since November.

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan , opens new tab slipped 0.3%, paring some earlier losses, while Japan's Nikkei, opens new tab dropped 0.5%.

It was the beleaguered yen that was the main focus though, after the roaring greenback knocked the Japanese currency to a 34-year low of 153.24 per dollar.

It eased up slightly to 152.90 yen as the risk of government intervention potentially looms large now. Japan's top currency diplomat, Masato Kanda, warned on Thursday that authorities would not rule out any steps to respond to disorderly exchange-rate moves.

In commodities, metal prices were resilient in the face of a strong dollar while oil held gains after advancing more than 1% following an Israeli strike that killed three sons of a Hamas leader, fuelling worries that ceasefire talks might stall.

Brent rose 0.15% to $90.62 a barrel, and U.S. crude was 0.1% higher at $86.33 per barrel. Gold prices gained 0.3% to $2,338.79 per ounce, charging towards record highs, after losing 0.8% overnight.

Source: Reuters

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Ukadike Micheal

Commodity

Economic

The South Korean won plummeted to a 17-month low on Thursday, reaching 1,364.85 per dollar, marking a significant decline amidst a backdrop of various economic and geopolitical factors. The strengthening US dollar, propelled by rising inflation, and concerns over China's slowing consumer prices contributed to the downward pressure on the won. Furthermore, the unexpected defeat of South Korean President Yoon Suk Yeol's party in parliamentary elections added to the currency's woes, amplifying market uncertainties.

HI Investment & Securities warned of the potential for further depreciation of the won, projecting a drop to as low as 1,400 per dollar if crude oil prices surge to $100 a barrel. This forecast underscores the susceptibility of South Korea's economy to fluctuations in commodity prices, particularly oil, given its heavy reliance on energy imports. The firm's economist, Park Sang-hyun, emphasized the significant threat posed by rising oil prices, highlighting the potential impact on the country's economic stability.

The ongoing oil rally, coupled with expectations of substantial dividend payouts by local firms to foreign investors, is expected to exert additional pressure on the won. Technical analysis suggests that the next support level for the won lies at 1,400 per dollar, indicating the potential for further weakness in the currency. As South Korea imports the majority of its energy needs, including oil and natural gas, from global markets, the surge in commodities prices poses significant risks to its economic outlook.

Recent developments in the oil market, with Brent futures trading above $90 and West Texas Intermediate nearing $86, reflect heightened geopolitical tensions. Concerns about potential conflicts in the Middle East, such as an attack on Israel by Iran or its proxies, have further contributed to market uncertainties. Moreover, ongoing supply cuts by OPEC+ have tightened the global oil market, driving prices higher and fueling speculation of a return to $100 per barrel.

The surge in oil prices not only strengthens the US dollar trend by fueling global inflation but also prompts increased demand for the dollar from local importers purchasing materials. This double impact exacerbates the pressure on the South Korean won, leading to expectations of further depreciation in the near term. The combination of external economic pressures and domestic political uncertainties underscores the challenges facing South Korea's currency and economy.

The South Korean won faces mounting challenges amidst a complex economic and geopolitical landscape. Rising oil prices, geopolitical tensions, and domestic political developments pose significant risks to the currency's stability and economic growth prospects. Proactive measures are essential to mitigate these risks and safeguard the resilience of South Korea's economy in the face of external shocks.

Source: Bloomberg

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Ukadike Micheal

Economic

Stocks

During the week ending April 5, foreign investors seized opportunities in Japanese stocks, capitalizing on discounted prices resulting from profit booking by domestic institutions in late March. They injected a net 829.45 billion yen ($5.42 billion) into Japanese equities, marking a sharp reversal from the prior week's net selling of about 1.18 trillion yen.

Concurrently, domestic institutional investors withdrew a net 334.8 billion yen from Japanese stocks during the same period. Notably, the domestic cash equity markets saw a net influx of 1.18 trillion yen in overseas capital, the highest weekly inflow since at least 2018. However, foreigners offloaded about 352.68 billion yen worth of derivative contracts. Overseas Investors Seize Japanese Stocks at Discount Prices_1

Overseas Investors Seize Japanese Stocks at Discount Prices_1

Last week, the Nikkei shed 3.4%, its most significant weekly decline since December 2022, amidst profit booking and concerns over potential intervention by Japanese authorities in the currency market. The market sentiment was further dampened by a sell-off in Fast Retailing stocks due to worries about slowing domestic demand at its flagship Uniqlo brand, resulting in Fast Retailing shares losing 6.32% during the week, the largest decline since January 2023.

Despite the recent downturn, the Nikkei continues to trade above a support line formed since February 21, bolstering expectations of a potential rebound. Foreigners sold 349 billion yen of long-term Japanese bonds, marking the second weekly net selling in three weeks, according to data from the Ministry of Finance.

Conversely, Japanese short-term debt securities attracted a robust 4.39 trillion yen in foreign inflows during the week, the highest amount since January 5. Meanwhile, Japanese investors shifted their focus to purchasing 346.4 billion yen of long-term foreign bonds, in contrast to the net selling of 1.66 trillion yen in the previous week. Overseas Investors Seize Japanese Stocks at Discount Prices_2

Overseas Investors Seize Japanese Stocks at Discount Prices_2

However, Japanese investors continued their net selling trend in short-term debt instruments, withdrawing a marginal 3.1 billion yen for the third consecutive week. The dynamic interplay between foreign and domestic investors in Japanese markets reflects the evolving sentiment and investment strategies amidst fluctuating market conditions.

The surge in foreign investment in Japanese stocks amidst a backdrop of profit booking and market volatility underscores the resilience of the Japanese equity market and the attractiveness of value opportunities for foreign investors. However, ongoing uncertainties surrounding currency interventions and domestic demand dynamics pose challenges to market stability and investor sentiment.

Source: Reuters

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Ukadike Micheal

Economic

Forex

Political

A resurgence in US inflation poses a significant challenge to Joe Biden's re-election campaign, complicating his efforts to tout his economic accomplishments and defend his record against criticisms from Donald Trump. The 3.5% annual increase in the March consumer price index, following a 3.2% gain the previous month, undermines Biden's narrative of steady inflation reduction since its peak in 2022.

The sudden uptick in inflation threatens to delay anticipated interest rate cuts by the Federal Reserve, potentially prolonging high borrowing costs for American households. Despite the creation of over 15 million jobs under Biden's administration, the persistent inflationary pressures have overshadowed his economic stewardship, emerging as a significant vulnerability ahead of the November election.

While White House officials anticipate a temporary setback in inflation reduction efforts, they remain optimistic about the prospects of easing inflationary pressures in the near future. Biden reaffirmed his expectation of Fed rate cuts during a press conference, albeit acknowledging potential delays due to recent inflationary trends.

Although Biden has narrowed the polling gap with Trump in recent weeks, the inflationary surge threatens to erode any gains, given the substantial increase in the consumer price index since Biden took office. Republican critics seized on the inflation data to assail Biden's economic policies, highlighting the disconnect between the White House narrative of a strong economy and the escalating cost of living for Americans.

Biden's economic team emphasizes their commitment to addressing rising prices and proposes policies aimed at alleviating financial burdens on households. However, the political implications of sustained inflationary pressures remain significant, with petrol prices and other factors exacerbating concerns about the cost of living.

Despite the challenges posed by inflation, Democratic strategists remain hopeful that voters will attribute the primary cause to corporate greed rather than Biden's policies. However, the political landscape remains uncertain, with the potential for further inflationary spikes impacting voter sentiment and shaping the trajectory of the campaign.

While market reactions to inflation data prompt speculation about Fed rate cuts, their political ramifications may be less significant than the broader economic trends. Nevertheless, the timing and magnitude of any Fed actions will be closely monitored, as they could influence market dynamics and perceptions of the administration's economic management.

The resurgence of inflation presents a formidable obstacle to Biden's re-election bid, posing challenges to his economic narrative and fueling criticisms from political opponents. As policymakers navigate the complex economic landscape, the political fallout from inflationary pressures remains a key consideration in shaping the outcome of the upcoming election.

Source: Financial Times

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Glendon

Economic

Amazon remains a behemoth in the global market, but assessing its stock requires a deep dive into its various business segments—Amazon Web Services (AWS), advertising, retail, and emerging technologies like artificial intelligence (AI). Here’s an exploration of these areas to determine if Amazon stock is a buy right now.

Amazon Web Services (AWS)

AWS has consistently been a strong performer for Amazon, and its growth seems to be accelerating. After growing 13% year-over-year in the latest quarter, an increase from 12% in the previous two quarters, AWS is expected to continue this upward trend. The end of workload optimization efforts suggests a more stable and possibly more profitable future. Comparatively, Microsoft has reported similar trends, indicating a robust industry-wide demand for cloud services. Analysts are forecasting a 14.9% year-over-year sales growth for AWS, marking significant continued expansion.

Advertising

Amazon's advertising segment has shown impressive growth, with year-over-year increases of 26% and 27% in recent quarters. With the introduction of ads in Prime Video and price increases, another strong quarter is anticipated. Although a significant acceleration isn’t expected, maintaining mid-20% growth is considered positive. This segment remains a lucrative area due to its high margins and is expected to expand further as Amazon integrates more advertising into its streaming services.

Retail

Despite being the largest category, retail is often the most overlooked by investors. Last quarter, retail performance was strong, and trends indicate continued improvement. Much of Amazon’s overall profitability improvements have stemmed from its retail operations, including cost savings and enhanced delivery speeds from its regional hub model. These enhancements are expected to drive further improvements in profitability.

Profitability

Amazon has seen remarkable profitability improvements recently, with operating profits consistently beating expectations. These factors include more favorable shipping rates, lower fuel prices, and a more rational labor environment. The high-margin advertising sector also contributes positively to the overall profit margins.

Artificial Intelligence

Amazon is positioning itself as a leader in generative AI, which is expected to significantly boost revenues in the coming years. As AI technology adoption accelerates, Amazon’s early investments and strategic focus could yield substantial returns. The upcoming earnings report might provide more insights into how AI will shape Amazon’s future strategies.

Market Expectations and Analyst Outlooks

Amazon is expected to report a 12% year-over-year increase in sales, reaching $142.66 billion, with earnings per share expected to rise significantly by 167% to 83 cents, as per FactSet. These figures reflect both the company’s robust growth trajectory and its ability to adapt and capitalize on market opportunities.

Conclusion

Considering the data and prospects across its diverse portfolio, Amazon appears well-positioned for continued growth in its core areas, especially AWS and advertising. The advancements in AI and ongoing improvements in retail operations also support a positive outlook for the stock. While the decision to buy will depend on individual investment strategies and market conditions, Amazon’s stock shows promising signs for those looking for growth and stability in a dynamic market environment. Thus, for many investors, Amazon could indeed be a buy.

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