China's Inflation Holds Steady In May, Factory Deflation Eases

Economic

Summary:

China's consumer inflation held steady in May while producer price declines eased, but the underlying trend suggests Beijing would need to do more to prop up feeble domestic demand and an uneven economic recovery.

The consumer price index (CPI) rose 0.3% in May from a year earlier, matching a gain in April, data from the National Bureau of Statistics (NBS) showed on Wednesday, below a 0.4% increase forecast in a Reuters poll.

CPI edged down 0.1% from the month before, against a 0.1% rise in April and compared with economists forecasts for zero growth.

The slide in the producer price index (PPI) eased to 1.4% in May from 2.5% in April, compared with a forecast 1.5% decline.

"I think the deflationary pressure has not faded yet," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

"The CPI inflation is slightly negative in m-o-m terms. The improvement in PPI is largely driven by commodity prices such as copper and gold, which is not a reflection of China’s domestic demand," he said.

China's economy has struggled to motor on despite the end of stringent Covid curbs in late 2022, mainly due to the ripple effects of a prolonged property sector crisis on investor, business and consumer confidence.

Beijing has rolled out several measures to spur demand in the housing sector and launched other schemes to boost consumer sentiment, including offering government-subsidised incentives to spur trade-ins of autos and other consumer goods.

It has also vowed to create more jobs linked to major projects, roll out measures to promote domestic demand targeted for youths and has pledged greater fiscal stimulus to shore up growth.

Wednesday data on the core inflation measure, which excludes volatile food and energy prices, highlighted the fragility of domestic demand. It stood at 0.6% in May year-on-year, slowing from 0.7% in April.

Many economists expect Beijing to unveil more support measures in coming months to keep the economy on track to reach its GDP growth target of "around" 5% for this year, and foster a sustainable rebound.

"A more comprehensive and proactive policy stance covering fiscal, monetary, and property sector may be necessary to boost domestic demand more effectively," Pinpoint's Zhang said.

Source:Reuters

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Cohen

Economic

Gold price (XAU/USD) showed some resilience below the $2,300 mark and posted modest gains for the second straight day on Tuesday. The uptick, however, lacks bullish conviction as traders keenly await the release of the latest consumer inflation figures from the United States (US) and the outcome of the highly-anticipated Federal Open Market Committee (FOMC) meeting later this Wednesday. This should provide fresh cues about the likely timing when the Federal Reserve (Fed) will start cutting interest rates, which, in turn, will play a key role in influencing the next leg of a directional move for the non-yielding yellow metal.

Heading into the key data/event risks, growing acceptance that the Fed will keep rates higher for longer amid a strong US labor market and sticky inflation continues to act as a headwind for the Gold price. The hawkish outlook, meanwhile, assists the US Dollar (USD) to stand tall near a one-month peak, which, in turn, is seen as another factor that contributes to capping the upside for the XAU/USD. The downside, however, seems cushioned in the wake of political uncertainty in Europe and persistent geopolitical tensions, warranting caution before positioning for an extension of the recent pullback from the all-time peak.

Daily Digest Market Movers: Gold price bulls remain on the sidelines amid hawkish Fed expectations

Reduced bets for an imminent interest rate cut by the Federal Reserve in September, along with China's decision to pause buying, turn out to be key factors capping the upside for the Gold price.

The current market pricing indicates that the Fed could cut rates by only 25 basis points this year, either at the November or December policy meeting, which continues to underpin the US Dollar.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, stands tall near its highest level since May 9 and contributes to keeping a lid on the Dollar-denominated commodity.

Traders, however, now seem reluctant and prefer to wait for more cues about the likely timing when the Fed will start cutting interest rates before placing fresh directional bets around the XAU/USD.

Hence, the focus will remain glued to Wednesday's release of the latest US consumer inflation figures and the crucial FOMC monetary policy decision, due to be announced later during the US session.

Stronger jobs and wage data released on Friday raised concerns that inflation may remain sticky amid a still resilient US economy, which, in turn, will reaffirm higher for longer interest rates narrative.

The headline US Consumer Price Index is expected to ease to 0.1% in May from the 0.3% previous, and the yearly rate is seen unchanged at 3.4%, still well above the Fed's annualized target of 2%.

Moreover, Core CPI is anticipated to hold steady at 0.3% during the reported month and edge lower to the 3.5% YoY rate from 3.6% in April, reaffirming stubbornly high inflationary pressure.

Meanwhile, the US central bank is expected to leave interest rates unchanged and release updated economic projections, including the so-called "dot plot", which will influence the precious metal.

Technical Analysis: Gold price needs to break below $2,285 support for bears to seize control

From a technical perspective, the $2,300 round figure now seems to act as immediate support ahead of the $2,285 horizontal zone. Against the backdrop of Friday's breakdown below the 50-day Simple Moving Average (SMA), some follow-through selling below the latter will be seen as a fresh trigger for bearish traders. Given that oscillators on the daily chart are holding in the negative territory, the Gold price might then accelerate the slide towards the next relevant support near the $2,254-2,253 region. The downward trajectory could extend further towards the $2,225-2,220 area en route to the $2,200 mark.

On the flip side, any strength beyond the $2,325 hurdle is more likely to attract fresh sellers and remain capped near the 50-day SMA support breakpoint, currently pegged near the $2,345 region. This is followed by the $2,360-2,362 supply zone, which, if cleared decisively, should allow the Gold price to retest last week’s swing high, around the $2,387-2,388 area and reclaim the $2,400 mark. A sustained strength beyond the latter will negate any near-term negative bias and pave the way for a further appreciating move in the near term.

Source:FXStreet

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FastBull Featured

Daily News

[Quick Facts]

1. Israel thinks Hamas has rejected the ceasefire proposal.

2. "Political black swans" hit France, causing fluctuations in markets.

3. OPEC monthly report shows major central banks will ease policy in H2.

4. WSJ's Timiraos thinks the Fed will keep interest rates unchanged.

[News Details]

Israel thinks Hamas has rejected the ceasefire proposal

The Palestinian Islamic Resistance Movement Hamas responded to the U.S. ceasefire proposal on the Gaza war on Tuesday, but Israel said the response was tantamount to a rejection. An Israeli official said on Tuesday the country had received Hamas' answer from the mediators and that Hamas "changed all of the main and most meaningful parameters." Hamas also rejected the proposal for a hostage release that was presented by President Biden.

A Hamas official said the Palestinian group merely reiterated longstanding demands not met by the current plan.

Egypt and Qatar said they had received Hamas' response to the proposal presented by President Biden on May 31, but they did not disclose details. A Hamas official who declined to be named told reporters that the organization reiterated its position that a ceasefire agreement must include permanent cessation of hostilities, Israel's complete withdrawal from the Gaza Strip, reconstruction of Gaza, and the regaining of freedom for Palestinians held by Israel.

The United States has indicated that Israel has accepted its proposal, but the Israeli side has not responded to this publicly. Israel continues to launch attacks in central and southern Gaza and has repeatedly stated that it will not commit to ending the Gaza operation until Hamas is eliminated.

"Political black swans" hit France, causing fluctuations in markets

As French President Emmanuel Macron decided to call an early parliamentary election, which has an increasing impact, the French stock market recorded its biggest two-day decline in a year, with bank shares falling along with French government bonds. France's CAC 40 index closed down 1.3%, amounting to 2.7% losses over the past two sessions. Société Générale, Crédit Agricole and BNP Paribas led the declines, pushing the Stoxx Banks Index to drop by the most since last August. The Stoxx 600 index closed down 0.9%.

As it stands, the market did not at all anticipate any high political risk events in France and Europe. However, political risks will only increase in the coming weeks, with new polls and rumors causing sharp volatility.

OPEC monthly report shows major central banks will ease policy in H2

According to the OPEC Monthly Report, global major central banks, especially the Federal Reserve, the European Central Bank, and the Bank of England, are expected to shift to more accommodative monetary policies in the second half of the year, depending on how their economy and inflation will develop. From an industry perspective, the improvement in industry in non-OECD (Organization for Economic Co-operation and Development) economies has been significant, while industrial production in OECD economies is only expected to pick up gradually in the second half of the year from the weak levels seen since the beginning of the year. The services sector is maintaining a steady growth momentum globally, which is expected to be a major contributor to economic growth in the second half of the year. In particular, tourism will have a positive impact on oil demand.

WSJ's Timiraos thinks the Fed will keep interest rates unchanged

Nick Timiraos, a well-known financial journalist from the Wall Street Journal, predicted in his latest article that the Federal Reserve may announce to keep the federal funds interest rate within the range of 5.25%-5.5% on Wednesday. Fed officials may reserve their views in the much-anticipated policy statement and hint that their next move is more likely to be a rate cut than a rate hike.

Fed policymakers are divided on whether and when to cut rates, but these are matters for the future, rather than something to be resolved at the present. Right now, officials have reached a consensus, but this is overshadowed by investors' fervor for Fed rate forecasts.

After ending the rapid rate-hiking process last year, Fed officials generally agreed that holding steady is the best course of action for an economy with solid growth and slightly above-target inflation. In this summer, they will assess the impact of interest rates which reached a 20-year high a year ago on jobs, consumption, and inflation.

We don't expect a major policy change at the FOMC meeting this Wednesday, so we need to focus more on the new quarterly interest rate projections, known as the "dot plot".

[Focus of the Day]

UTC+8 14:00 U.K. GDP MoM (Apr)

UTC+8 16:00 IEA's Monthly Oil Market Report

UTC+8 20:30 U.S. CPI (May)

UTC+8 21:00 ECB Vice President Guindos Speaks

UTC+8 02:00 Next Day: Fed's June Interest Rate Decision

UTC+8 02:30 Next Day: Fed Chair Powell Holds Monetary Policy Press Conference

UTC+8 03:30 Next Day: Bank of Canada Governor Macklem Speaks

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Samantha Luan

Economic

Forex

Japanese Producer Prices and the Bank of Japan

On Wednesday (June 12), producer price figures from Japan influenced buyer appetite for the USD/JPY.

Producer prices increased by 0.7% in May after advancing by 0.5% in April. Economists forecast producer prices to rise by 0.4%. Furthermore, producer prices increased 2.4% year-on-year in May after a rise of 1.1% in April. Economists expected producer prices to increase 2.0% year-on-year in May.

Producers increase prices in a higher-demand environment, passing costs onto consumers. The latest figures could signal an improving demand environment and a possible uptick in demand-driven inflationary pressures.

On Friday, the Bank of Japan may consider the producer price numbers. However, the BoJ may need more data points to begin meaningful discussions about interest rate hikes. Household spending slid by 1.2% in April after private consumption fell by 0.7% in Q1 2024. Downward trends in household spending could leave the BoJ in a holding pattern in the near term.

Furthermore, the BoJ also needs to consider the effects of a weaker Yen on import costs and producer prices. Higher producer prices stemming from a weaker Yen could raise consumer prices and impact household spending further.

In a recent speech, Bank of Japan Deputy Governor Ryozo Himino raised concerns about the Yen, saying,

“Exchange-rate fluctuations affect economic activity in various ways. It also affects inflation in a broad-based and sustained way, beyond the direct impact on import prices.”

US Economic Calendar: The US CPI Report, FOMC Projections, and the Press Conference

Later in the session on Wednesday, the US CPI Report will attract investor attention.

Economists forecast the US annual inflation rate to remain at 3.4% in May. Furthermore, economists expect the core inflation rate to fall from 3.6% to 3.5% in May. Higher-than-expected numbers may sink investor bets on multiple 2024 Fed rate cuts.

A higher-for-longer Fed rate path may raise borrowing costs and reduce disposable income. Lower disposable income could curb consumer spending and dampen demand-driven inflation.

We anticipate heightened dollar sensitivity to the inflation figures, with the Fed delivering its interest rate decision late in the session. Economists predict the Fed will stand pat on Wednesday. However, uncertainty about the Fed rate path will give the FOMC Economic Projections and Press Conference more weight.

The recent US Jobs Report and the inflation numbers could lead to more hawkish economic projections and a US dollar breakout. Fed Chair Powell will also move the dial after the release of the projections.

Short-term Forecast

Near-term trends for the USD/JPY will depend on US inflation numbers, the FOMC Economic Projections, and the Bank of Japan. Hotter-than-expected US inflation numbers and more hawkish Economic Projections could tilt monetary policy divergence toward the US dollar. However, Bank of Japan forward guidance on Friday also needs consideration.

USD/JPY Price Action

Daily Chart

The USD/JPY hovered above the 50-day and 200-day EMAs, confirming the bullish price trends.

A USD/JPY breakout from 157.5 could support a move toward the 159 handle. If the USD/JPY moves through the 159 level, the bulls could take a run at the April 29 high of 160.209.

US inflation numbers, the FOMC Economic Projections, and the FOMC Press Conference need consideration.

Conversely, a USD/JPY fall through the 156.5 handle could bring the 50-day EMA into play. A break below the 50-day EMA could signal a fall toward the 151.685 support level.

The 14-day RSI at 56.89 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.

Source:FXEMPIRE

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Cohen

Economic

Commodity

Chinese crude oil imports over the first five months of the year were down by 130,000 bpd from a year earlier. In any other country, this would have been business as usual. In China, it may spell doom for prices.

The world’s biggest importer of crude is the logical focus of all demand projections and, consequently, price projections. Whatever their differences, the IEA and OPEC invariably point to China in their oil market reports as the driver of demand—and prices. This year, however, China may turn into a driver of pessimism in oil circles.

Because of its status as the largest oil importer, China’s intake of foreign crude is regularly used as a gauge of the country’s oil demand. The May average, for example, stood at 11.06 million barrels daily, which was an increase in the April average of 10.88 million bpd, suggesting an uptick in demand. Yet the May average was also below the 12.11 million bpd average for May 2023.

In a column discussing the apparent weakness of China’s commodity imports—except coal—Reuters’ commentator Clyde Russell noted the above figures as evidence of said weakness. However, it bears pointing out that last year, China hit a record in oil imports, booking a 10% increase over 2022. The average daily for the year stood at 11.3 million barrels daily.

Record imports are difficult to sustain for a longer period of time, so it must not have been difficult to predict some pullback in imports after that record year, especially since a lot of the oil that went into China in 2023 was used to fill inventories with discount Russian crude.

At the same time, a discrepancy is emerging between actual figures and OPEC’s forecast that China’s demand would rise by over 700,000 bpd this year to lead global growth of 2.25 million barrels daily. As Reuters’ Russell noted in his column, Chinese oil demand would have to rebound extremely strongly in the second half of the year to make that come true.

There are doubts this would happen. OPEC’s forecast for demand growth is the most bullish out there. Others are less optimistic, and that’s not even including the International Energy Agency. Energy Intelligence, for instance, has forecast Chinese oil demand growth at 494,000 barrels daily this year, which would still account for a solid chunk of global demand growth, at 40%. Interestingly, the IEA expects stronger Chinese oil demand growth than Energy Intelligence, at over 600,000 bpd.

What’s more, the weaker demand we have witnessed over the first half of the year was expected by some forecasters. In late 2023, these predicted that the real estate sector crunch would drive down diesel demand, which would in turn drag down overall oil demand growth despite an improvement in the demand for other fuels as travel picked up.

There were also grimmer forecasts, suggesting that growth in China’s demand for oil could slump to half of pre-Covid levels as soon as this year on the back of developments in the construction and the auto sector. Eurasia Group in February pegged the rate of demand growth for this year at between 250,000 bpd and 350,000 bpd, saying that “The incremental fuel demand growth in China that the oil industry has come to literally bank on over the past two decades is no more.”

Expectations of a consistent, sustained upward trend in demand for any commodity would be unrealistic in any case, but especially in the case of oil—and especially after a year of record imports. The slowdown after that record year was basically inevitable and as such should not have been a surprise. Of course, demand growth may yet gather steam in the second half but it is doubtful it would come close to OPEC’s forecast. And there is nothing catastrophic about this. It’s simply business as usual in a cyclical industry.

Source:oilprice

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Samantha Luan

Central Bank

Economic

Bank of Korea Governor Rhee Chang-yong called for a balanced approach in considering the timing of a policy pivot, another sign that the central bank is moving toward easing its restrictive interest rate later this year as inflation continues to cool.

“Shifting the policy stance too late could lead to market instability due to a weakening of the domestic demand recovery and continued rising delinquency rates,” Rhee said in a speech marking the BOK’s founding anniversary. “Conversely, shifting policy too early could slow the pace of inflation deceleration and increase exchange rate volatility and household debt growth.”

“As we enter the final stretch of the fight against inflation, a delicate and balanced judgment is needed that takes into account these trade-offs,” he said, according to a transcript released Wednesday by his office. Bank of Korea’s Rhee Calls for Balance in Considering Rate Cut_1

Bank of Korea’s Rhee Calls for Balance in Considering Rate Cut_1

Rhee kept speculation over a policy pivot simmering last month when he highlighted a steady outlook for inflation even as the bank revised its forecast for economic growth sharply higher. He attributed fresh gains in economic growth largely to technology exports that had little impact on domestic prices.

Rhee cited a Latin expression from ancient Rome that means “slow haste” to convey his vision.

“It may be time to revisit the principle of Festina Lente, a principle that the Roman Emperor Augustus put at the forefront of policymaking,” he said.

Most economists expect the bank to cut rates once or twice by year-end. A cut may come as early as August, some economists say.

One factor supporting an early move is a potential sign of weakness in the labor market. South Korea last month recorded the smallest year-over-year increase in jobs since early 2021, according to government statistics released Wednesday. That’s a sign the jobs market may be losing steam.

Bank of Korea’s Rhee Calls for Balance in Considering Rate Cut_2

Still, authorities are seeking more confidence that inflationary pressure will ease as expected and they remain wary of a resurgence in household debt, according to the minutes of their meeting in May, when they voted to hold the benchmark rate at 3.5%.

Rhee added in the speech that efforts to tamp down household debt should continue even though recent revisions to gross domestic product data lowered debt ratios. After the BOK said last week that South Korea’s economy was 7% bigger in 2023 than previously estimated, the ratio of household debt to GDP was recalculated to 93.5% from 100.4% by the Finance Ministry.

The BOK’s next policy announcement will come on July 11.

Source:Bloomberg

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Cohen

Economic

Political

Chinese exports jumped above forecasts in May as the second-largest economy leans more and more on foreign markets to boost growth.

But as Beijing unloads its products on the world, it's turning up the heat on trade tensions.

In dollar terms, exports rose 7.6% year over year, surpassing 6% estimates among economists polled by Reuters. According to customs data from Friday, that's the second month of accelerated growth.

At the same time, import data was lackluster, and withdrawn Chinese consumption has been a headwind so persistent that China is the sole country undergoing deflation.

For an economy increasingly needing alternatives to domestic consumers, Beijing is pinning its hopes for economic growth on foreign buyers. Friday's data suggests that technology products are boosting China's exports, resulting from the country's growing emphasis on advanced manufacturing.

That's not a welcome development for international competitors, however. With Chinese tech and green energy goods sweeping foreign producers away, both the US and European Union have responded with trade barriers.

Last month, President Joe Biden announced fresh tariffs against Beijing's advanced products, including quadrupling the duties on Chinese electric vehicles. Last week, tariffs resumed on Chinese-made solar panels coming through Southeast Asia after a brief moratorium.

As the Republican candidate, Donald Trump has meanwhile pledged even steeper protectionist policies, vowing to apply 60% tariffs on Chinese goods.

Analysts have been warning that no matter which US presidential candidate is elected in November, China's dependence on international markets is sure to spark a trade war. This could happen as soon as next year, China Beige Book CEO Leland Miller said.

Although one already took place prior to the pandemic, Beijing's manufacturing output has only grown since — a Capital Economics note said in March that China could no longer lean on smaller countries to absorb its product.

"China's exporters are probably more reliant now on US consumers than they were when the trade war began during Donald Trump's first term," the group chief economist, Neil Shearing, wrote.