Yellen's China Trip Yields Long Meetings, 'Cordial' Tone, But No Consensus

Dollar recovers mildly during today's Asian trading session but remains generally weak. Concurrently, Japanese Yen has begun to pare back some of its late rally from last week, but there is no sign of sustained selling. Risk markets are showing a mixed performance, reacting minimally to China's data that indicate escalating deflation risks.

Notably, the majority of major currency pairs stays bounded within Friday's range, with New Zealand Dollar being an exception. Kiwi appears to be softening slightly as market anticipates RBNZ to maintain its current policy rate later in the week. Conversely, Canadian Dollar is experiencing a slight firming, buoyed by rise in oil prices and anticipated BoC rate hike. Meanwhile, European majors show no clear direction as of now.

Technically, WTI crude oil's break of 72.57 resistance suggests that triangle consolidation from 74.74 has possibly completed at 66.94 already. Further rise is now in favor to 74.74 resistance first. Firm break there will target 100% projection 63.67 to 74.74 from 66.94 at 78.01. It's too early to talk about larger bullish trend reversal in oil. So, focuses will be on topping signal around 78.01 projection level.

In Asia, at the time of writing, Nikkei is down -0.14%. Hong Kong HSI is up 0.75%. China Shanghai SSE is up 0.15%. Singapore Strait Times is up 0.34%. Japan 10-year JGB yield is up 0.0333 at 0.470.

China's factory-gate inflation, as measured by PPI, marked its ninth consecutive decline in June, slumping by -5.4% yoy. This drop is the steepest since December 2015 and outstripped -4.6% yoy in May, a well as expectation of -5.0 yoy. PPI fell -0.8% on a month-on-month basis in June, slightly less than the -0.9% mom fall registered in May.

National Bureau of Statistics statistician Dong Lijuan pointed to tumbling commodity prices, particularly oil and coal, as the driving force behind the slump in factory-gate prices. The comparison to high base figures from the previous year also played a role in the significant drop.

Additionally, China's CPI continued to lose momentum, sliding from 0.2% yoy in May to 0.0% yoy in June, its lowest reading since February 2021. This downturn defied expectations of a 0.2% yoy. On a month-on-month basis, June's CPI mirrored the previous month, dipping by -0.2%.

Analysing the CPI's components, core CPI, which excludes volatile food and energy prices, showed a tempered 0.4% yoy rise, compared to 0.6% yoy in May. Food prices accelerated by 2.3% yoya leap from May's 1.0% yoy increase, while non-food prices moved in the opposite direction, falling by -0.6% yoy in contrast to a flat performance in May.

The sustained descent in PPI, coupled with lackluster CPI, underlines the ongoing deflationary pressures in China's economy.

Speaking at a conference in Aix-en-Provence, France, ECB Governing Council member Francois Villeroy de Galhau stated that Eurozone was nearing the "high point" of interest rates, a level expected to be sustained to allow full transmission of monetary policy effects.

Villeroy added, "But when I say high point this isn't a peak, rather it will be a high plateau, on which we will have to remain for a sufficiently long time to fully transmit all the effects of monetary policy."

Joining him on the panel was fellow Governing Council member Mario Centeno, who underlined ECB's focus on headline inflation, noting its more rapid than anticipated decrease. However, he also highlighted the importance of core inflation, which he acknowledged was not dropping as swiftly.

Centeno stressed, "We target headline inflation, that's very important. And headline inflation is coming down, actually it's coming down faster than the way up."

Centeno went on to add, "Core inflation stands out as a very important indicator. It's not coming down as fast as headline inflation, but we also need to remember that in the way up it played exactly the same trajectory. So we need to remain confident too in the way we are fighting inflation."

This week presents a significant blend of international central bank activities and key economic indicators. On the monetary policy front, the anticipated pause by RBNZ and BoC hike will be complemented by release of Fed's Beige Book and ECB minutes. In addition, the release of inflation data from the US, as well as GDP and employment figures from the UK, will also be integral to the unfolding developments in the markets.

RBNZ is widely anticipated to maintain its interest rates unchanged at 5.50% this week, drawing the curtains on its 20-month tightening cycle. Following its May decision, which saw a 25bps rise in OCR approved by a 5-2 vote, economists interpret the statement as a shift by the central bank into a "wait and see mode." Consensus amongst the country's leading banks – ANZ, ASB, Bank of New Zealand, Kiwibank, and Westpac – aligns with the market's expectation of no rate changes this round. Meanwhile, RBNZ is anticipated to reiterate its reluctance to initiate interest rate cuts any time in the near future.

In contrast, BoC is expected to forge ahead with its recently resumed tightening cycle, hiking interest rates by 25bps to 5.00%. While some analysts forecast a pause post-July, the trajectory beyond remains hazy. The central bank's preferred CPI trim and median still linger at high levels, and the pace at which they'll decelerate is uncertain. As a result, market will keenly parse BoC's guidance for indications of its confidence post-rate hike.

In other central bank activities, ECB will publish accounts of June monetary policy meeting. The details shouldn't deviate from recently repeated messages that another rate hike is there to be delivered this month. The case for September is uncertain and will be data-dependent. Meanwhile, Fed will also release Beige Book economic report.

On the data front, much focus will be on US CPI and PPI, and on whether they would support two or more Fed hikes this year as the "strong majority" of FOMC members anticipated. UK GDP and employment data will prove crucial amidst rising concerns about hard landing due to BoE extension of its tightening efforts to curb inflation. There are talks that BoE rate could hit as high as 7%. Observers are also keeping a keen eye on Germany's ZEW economic sentiment, Australia's Westpac consumer sentiment and NAB business confidence, along with China's CPI and PPI.

· Monday: Japan bank lending, current account; China CPI, PPI; Eurozone investor confidence.

· Tuesday: Australia Westpac consumer sentiment, NAB business confidence; Germany CPI final, ZEW economic sentiment; UK employment.

· Wednesday: RBNZ rate decision; Japan machine orders PPI; US CPI, Fed's Beige Book; BoC rate decision.

· Thursday: New Zealand BNZ manufacturing; China trade balance; UK GDP, production, trade balance; Eurozone industrial production, ECB meeting accounts; US PPI, jobless claims.

· Friday: Swiss PPI; Eurozone trade balance; Canada manufacturing sales; US import prices, U of Michigan sentiment.

AUD/USD dips mildly today but stays inside established range above 0.6594. Intraday bias remains neutral for the moment. With 0.6710 resistance intact, further decline is in favor. On the downside, break of 0.6594 will resume the decline from 0.6898 to 0.6457 support next. Nevertheless, firm break of 0.6719 will turn bias back to the upside for stronger rebound.

In the bigger picture, price actions from 0.7156 are seen as a correction to the rebound from 0.6169 only, rather than part of larger down trend from 0.8006 (2021 high). Break of 0.6457 could cannot be ruled out but downside should be contained above 0.6169. Meanwhile, nevertheless, break of 0.6898 resistance will argue that rise from 0.6169 is ready to resume through 0.7156.

The oil market managed to pull off a second consecutive week of gains with ICE Brent settling almost 4.8% higher last week. Cuts from both Saudi Arabia and Russia have provided some support, although the market will have to continue to contend with macro uncertainty, which has capped the market over the last couple of months. The recent action taken by Saudi Arabia will likely provide some comfort to longs as it sends the signal that the Saudis are committed to putting a floor under the market. The latest positioning data shows that speculators increased their net long in ICE Brent by 25,106 lots over the last reporting week to 184,906 lots as of last Tuesday. This move was predominantly driven by fresh longs entering the market, with the gross long increasing by 16,881 lots. Meanwhile, for NYMEX WTI, speculators increased their net long by 23,820 lots to 95,363 lots. This was driven almost exclusively by short covering. At 112,155 lots, the gross short in WTI is still sizeable and so with the right catalyst, there is the potential for a short-covering rally.

Another factor which is providing some degree of support to the market is the refilling of the U.S. Strategic Petroleum Reserve (SPR). On Friday the Department of Energy (DoE) announced that it will be looking to purchase around 6MMbbls of U.S. sour crude oil for delivery in October/November. Up until now, the DoE has successfully tendered for 6.3MMbbls, with this volume set to be delivered in August and September. There had been reports that the DoE was looking to buy roughly 12MMbbls this year, and if we see the total volume awarded in the latest announcement, that would get us to this 12MMbbls already.

A large explosion at a Mexican platform, which was sadly deadly, saw Pemex reduce oil output by 700Mbbls/d. However, the bulk of these shut-ins appears to have been precautionary and 600Mbbls/d of this output has already returned, according to the company.

Drilling activity in the U.S. continues its decline with the latest data from Baker Hughes showing that the number of active U.S. oil rigs fell by five over the week to 540. This is the lowest number since early April 2022. The number of active oil rigs in the U.S. has fallen by 81 since the start of the year. Lower drilling activity suggests more limited supply growth. And this is a trend that we have seen in the EIA's U.S. crude oil supply forecasts with less than 200Mbbls/d of U.S. supply growth expected in 2024. The EIA will release its latest Short-Term Energy Outlook on Tuesday, which will include U.S. production forecasts for the remainder of 2023 and 2024.

In addition to the EIA's Short-Term Energy Outlook release on Tuesday, both OPEC and the IEA will release their latest monthly oil market reports on Thursday. Given the macro uncertainty, the market will likely be focused on any changes to demand forecasts in both reports. Away from energy markets, the big macro release this week will be U.S. CPI numbers on Wednesday, which will likely further shape market expectations on how much more monetary tightening we could see from the U.S. Federal Reserve in the months ahead.

In the latest twist of events, the US dollar experienced a decline, dropping below 103 on Friday, as the latest non-farm payroll (NFP) data raised concerns about the need for further tightening measures by the Federal Reserve. With the US economy adding only 209,000 jobs in June, the lowest figure since December 2020, doubts emerged regarding the strength of the labor market recovery. However, the jobless rate saw a slight decrease to 3.6%, and wage growth surpassed market expectations, reaching 4.4%. This article delves into the implications of the NFP data on the US dollar and explores the potential outlook for the currency.

The disappointing NFP data had an immediate impact on the US dollar, resulting in the dollar index dropping below the 103 level. The figure of 209,000 new jobs added in June fell short of expectations, fueling doubts about the robustness of the economic recovery. However, the positive aspect of the report was the decrease in the jobless rate, which offered some solace to market participants.

Following the release of the NFP data, traders adjusted their expectations for future Federal Reserve actions. While a 25 basis points hike in the fed funds rate this month is now fully priced in, the odds of another quarter-point increase beyond July decreased. The underwhelming job growth figures raised doubts about the need for a more aggressive approach to monetary tightening by the central bank.

USDCAD, the currency pair representing the US dollar against the Canadian dollar, has been trading in an uptrend within a rising channel pattern. However, Friday's NFP news triggered a sharp drop in the pair's value. Currently, the price is approaching a support line within the rising channel on a 4-hour timeframe, suggesting the potential for a bullish rebound towards the target level above. However, if the price breaks and closes below the support of the channel, a bearish continuation could be expected.

The weakened US dollar and the uncertainties surrounding future Fed tightening policies present implications for traders. The decline in the dollar index underscores the importance of closely monitoring economic data and central bank communications, as market sentiment can quickly shift based on these factors. Traders should remain cautious and adapt their strategies accordingly, considering the potential for increased volatility and the evolving market landscape.

The US dollar faced a setback as the latest NFP data fell short of expectations. The dollar index weakened, reflecting concerns about the labor market's recovery and raising doubts about the need for further tightening measures by the Federal Reserve. Traders adjusted their expectations for future Fed actions, and the implications were felt across currency pairs, including USDCAD. As the market landscape continues to evolve, traders must stay vigilant, closely monitoring economic indicators and central bank communications to make informed trading decisions in a potentially volatile environment.

European markets underwent a shocker of a week last week, posting their biggest declines since March, despite a modest rebound on Friday.

With economic data continuing to look on the soft side and central banks showing little sign of easing up when it comes to interest rate rises there was little to cheer for markets in Europe, with concerns about weakness in the Chinese economy adding to the gloom.

U.S. markets on the other hand, while still finishing the week lower, still managed to perform better after a slightly weaker than expected non-farm payrolls job report, which showed that the U.S. economy added 209k jobs in June, down from 306k in May. There was also a 2-month net revision lower of -110k, taking some of the lustre off recent gains, and removing some of the euphoria around the ADP jobs number of 497k, the day before.

The unemployment rate still fell to 3.6%, while average hourly earnings growth came in unchanged at 4.4%, which was at a slightly higher level than expected.

One thing that we were able to take away from last week was that further rate rises from the Federal Reserve as well as the European Central Bank are almost certain when they both meet in 2 weeks' time, however there is now rising concern that we may see further rate increases after that in September as well.

The bond market is certainly reflecting the fact that rates are likely to stay higher for longer after the yield curve steepened as 10-year yields outperformed 2-year yields on a week-on-week basis.

With earnings season set to get underway in earnest over the next week or so, there is increasing nervousness that after such a good first half of the year, that the second half of the year is likely to be much more challenging.

What last week's economic data also tells us is that while the economy in Europe could well be set to contract for the third successive quarter in succession, the U.S. economy appears to be holding up reasonably well

There is a fear however that central banks are on the cusp of a serious policy mistake when it comes to their determination to drive inflation lower. We already know that inflation has been slowing sharply over the last few months, and we also know that PPI inflation in China and Europe is now in negative territory.

This morning we saw that inflation in China slowed even further in June with headline CPI coming in at 0%, and PPI slipping from -4.6% in May to -5.4%

That alone suggests that the rate hikes that have already been implemented over the past 15 months have had an effect, however such is the nature of monetary policy, and the way interest rate markets have changed over the last 20 years, with many more fixed rate loans, there is no way of telling how much more tightening has yet to come through.

This should make central bankers much more cautious, however it seems to be having the opposite effect, causing frustration that inflation isn't coming down quickly enough, due to resilient consumption patterns.

With U.S. CPI for June set to be released on Wednesday, and PPI on Thursday we are likely to see further evidence of this disinflationary trend, even while wages growth remains resilient.

These are the key macro items for investors to mull over this week ahead of the Federal Reserve later this month, while in the UK tomorrow we have the latest wages and unemployment numbers for the 3-months to May, which are expected to show strong wages growth against a backdrop of a tight labour market.

EUR/USD – broke higher last week after finding solid support around the 1.0830/40 area. We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week opens the way for a potential move towards 1.0780.

GBP/USD – broke above resistance at the 1.2770/80 area putting it on course for a move towards the 1.3000 area, but needs to take the 1.2850 area and June highs first. Support comes in at the 1.2770/80 area, and below that at 1.2680.

EUR/GBP – continues to find support at the 0.8515/20 area and June lows. Also has resistance at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8635. Below 0.8500 targets 0.8460.

USD/JPY – fell below the 144.00 area triggering stops all the way to the 142.00 area, also falling below support at 142.50. Posted a weekly reversal suggesting the top is in and the risk of a return to the 139.80 area. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.

During the past four years, there has been a rise in the tide of anti-globalization, accompanied by evident increases in unilateralism and protectionism. Various destabilizing, unpredictable and unforeseeable factors have emerged, posing unprecedented risks and challenges to the global economy.

Against such a backdrop, the 14th Annual Meeting of the New Champions, also known as the Summer Davos Forum, which took place in Tianjin late last month, aimed to lead the international community in jointly exploring ways to address global economic risks and challenges, and together shape a more equitable, sustainable and resilient global economy.

In the process of economic globalization, economies around the world have become more closely interconnected. In this regard, factors including production efficiency, growth potential and development opportunities are no longer matters of a single country, but represent shared global concerns.

However, economic globalization also comes with growing challenges from imbalances in global development, governance difficulties and persistent equity issues. It should also be noted that these challenges are not inevitable consequences of the process, but rather the accumulation of various barriers that hinder it and a result of the weakening of the multilateral trade mechanisms that underpin a stable world economy.

The key to addressing such challenges lies in building a higher level, more open world economy and firmly promoting economic globalization in a more open, inclusive, equitable, balanced and mutually beneficial way.

In recent years, the world has witnessed a slew of "black swan" and "gray rhino" events, which have caused tremendous impacts on the global economy. When facing mounting risks and obstacles, certain countries have chosen to politicize economic and trade matters, as well as pursue decoupling and fragmentation, leading to confrontations and conflicts and significantly disrupting the security and stability of global supply chains.

These actions appear to aim at reverting the global economy back to a bygone era of isolation — a strategy that has already been proved by past experience to have failed to mitigate global risks and instead further endanger an already precarious global economy. Countries adopting hegemonic and coercive moves not only raise economic risks for others, but also expose their own economies to a high level of vulnerability.

Resources are not the only thing to have become highly interconnected between countries in the context of globalization — risks are the same, because economic problems and crises within one country can rapidly spread and evolve into global economic concerns. This is why, global challenges require collective efforts, and unity and cooperation are the only way out for global risk management.

Take for example the global financial crisis of 2007-09 triggered by the United States subprime mortgage crisis, where the international community learned how important strengthening unity and cooperation is to crisis response.

Many financial institutions collapsed at that time, resulting in widespread unemployment and a global economic recession. Therefore, leaders of the G20 held an initial meeting in Washington in November 2008 to address the serious financial issues and they came up with a clear and efficient cooperative mechanism in the end.

The following year, G20 leaders held two additional summits in quick succession, reaching an important consensus on promoting global economic recovery and opposing protectionism. Thanks to the close cooperation among major economies in the aftermath of the crisis, the global economy achieved a rapid rebound and gradually got back on the right track.

In 2020, the COVID-19 pandemic caused one of the most severe global economic downturns since the Great Depression of the 1930s. Besides its lingering impact, the global economy also faces policy risks from certain major economies prioritizing their own interests. The accumulation of other factors — such as global debt burden, heightened financial market turbulence, food and energy shortages, disruptions in industrial and supply chains, and frequent climate disasters — have shown how multifaceted current global economic risks can be. Making the right choices, once again, tests the wisdom of all humanity.

At this year's Summer Davos Forum in Tianjin, political and business leaders from various countries and regions confronted global risk challenges and ignited sparks of unity and cooperation, undoubtedly injecting new momentum into the global economy.

Unlike the "reducing dependence "or "de-risking" approaches advocated by some countries, China has consistently promoted closer and mutually beneficial interactions with the world, continuously bringing certainty to the global arena through its long-term stable development.

Over the years, China has actively participated in and promoted the process of economic globalization, stimulating the vitality and creativity of market entities, improving the business environment and developing a higher level, more open economy. This has led to an open pattern of internal and external connectivity and mutually beneficial cooperation between the East and the West.

It has also taken the lead in opening-up and promoting mutual openness among countries and regions worldwide, facilitating an efficient, orderly and secure flow of various factors in global production networks. Through the Belt and Road Initiative, it actively implements global development, civilization and security initiatives to build a community with a shared future for humanity.

Therefore, China's stable and positive economic performance presents opportunities rather than risks to the world. According to a World Bank report, from 2013 to 2021, China contributed an average of 38.6 percent to global economic growth — more than the combined contribution of the Group of Seven member countries. This undoubtedly serves as the primary driving force for global growth.

With its strong resilience and abundant potential, the basic trend of steady long-term growth for China's economy remains unchanged, despite the sustained deterioration of the global economic environment.

According to the World Bank's Global Economic Prospects released in June, China's economy will grow by 5.6 percent in 2023, 3.5 percentage points higher than the global growth rate and an upward revision of 1.3 percentage points compared to the organization's January forecast.

To address challenges faced by the global economy and enhance confidence in global economic growth, the country will continue adhering to the principles of communication, cooperation and shared benefits, providing more opportunities for dialogue and cooperation to the international community. As the world's second-largest consumer market and the largest goods trading nation, it will also continue to promote a high-level trade and investment environment for partners worldwide, and make greater contributions to global growth and the security of industrial and supply chains.

Germany's industrial sector faced another setback as industrial production unexpectedly declined by 0.2% month-on-month in May 2023. This contraction came as a surprise, deviating from market expectations of a flat reading and following a slight growth of 0.3% in April. The decline in output was mainly driven by a sharp decrease in the production of basic pharmaceutical products and pharmaceutical preparations, which contracted by 13.1%. Additionally, energy production witnessed a notable decline of 7%. However, the manufacture of motor vehicles, trailers, and semi-trailers experienced a positive upswing with a 4.9% increase. The overall production of consumer goods decreased by 1.2%, while intermediate goods recorded a decline of 0.5%. In contrast, the production of capital goods saw a modest increase of 1.3%. Outside the industrial sector, construction output dropped by 0.4%. On an annual basis, the growth in industrial production slowed to 0.7% in May from 1.7% in April.

The continued weakness in Germany's industrial sector raises concerns of a possible three-quarter-long recession, which would be a rarity for the country. The recent decline in industrial production comes at a time when German industry is struggling to gain momentum. The May figures highlight the need for a significant surge in activity in June to avoid an extended period of economic contraction.

The initial optimism observed earlier this year has been replaced by a more sobering reality. Production expectations have weakened, order books have significantly thinned out despite the rebound in May, and inventory build-up remains incomplete. Moreover, recent PMI surveys for June confirm the contraction in Germany's industrial sector, indicating a challenging economic environment.

Germany's PMI for June fell short of expectations with a reading of 41, signaling a deeper contraction for what was once Europe's growth engine. The Eurozone's PMI survey also revealed a worsening trend in new business across goods and services in June, as new orders declined for the first time since January. These deteriorating demand conditions pose downside risks to output in July, as noted by S&P Global.

The slowdown in Germany's industrial sector may persist for several years, fueled by structural changes and external factors. Ongoing geopolitical tensions, demographic shifts, and the energy transition are expected to weigh on the German economy in the coming years. International competitiveness has also declined, as reflected in net outflows of Foreign Direct Investments. This trend accelerated in 2021 and 2022, further adding to the economic challenges.

All in all, the latest monthly data for the first two months of the second quarter have not diminished the risk of a further contraction in the German economy. If this contraction continues, it would mark the first time since 2008 that the German economy has shrunk for more than two consecutive quarters. The economy had contracted by 0.5% in the final quarter of 2022 and an additional 0.3% in the first quarter of 2023. The situation calls for close monitoring and potential policy measures to support economic recovery and address the underlying structural challenges.