In today’s briefing:
- China Not Yet in a Deflationary Spiral but the Risks Are Mounting
- China’s Ongoing Real Estate Disaster Is Pushing Emerging Markets to the Brink
- Investment Screening: Why Biden’s Order is Actually a Good Sign for US-China Relations
- Malaysian Politics: Stalemate in Malaysia’s State Elections Buys Anwar Breathing Space
- The Energy Cable #33 – The handoff – From positioning to fundamentals
- UK: Jobs Melt with Wages Burning Hot
- China Watch: The People’s Bank Pickle – is 7.30 the line in the sand?
China Not Yet in a Deflationary Spiral but the Risks Are Mounting
- Consumer and producer prices in China fell in July, a symptom of its sluggish economy. However, fears of a deflationary spiral are premature, given the still-healthy core and services inflation.
- Growing slack in the economy, depressed economic sentiment, weak credit demand and the struggles of the trade-oriented manufacturing sector could, however, lead to deficient demand and downward price pressures.
- Beijing is ramping up stimulus efforts but it needs to overcome its half-heartedness, lest a deflationary mindset becomes entrenched among consumers and firms.
China’s Ongoing Real Estate Disaster Is Pushing Emerging Markets to the Brink
- Financial markets are increasingly being dominated by headlines from China, where it is becoming clearer every day that the country is facing a historic real estate recession.
- Despite the barrage of stimulus measures, Chinese and Emerging Market equity indices are trending down and is now within 1.5% of the 200-day moving average.
- The 200-day moving average is a powerful sentiment indicator, distinguishing between positive and negative market returns.
Investment Screening: Why Biden’s Order is Actually a Good Sign for US-China Relations
- On August 9th, President Biden signed an executive order which addresses investment from US companies and individuals into China.
- The executive order is a follow-up on the October 7, 2022 order to ban exports of advanced chips and other strategic technology, but the executive order focuses on investment in Chinese firms that operate in these areas, which was seen as a loophole in the October 7 order.
- The Investment Screening order stipulates certain areas that are simply banned from investments, some areas where the government needs to be notified and then some areas that are completely exempt.
Malaysian Politics: Stalemate in Malaysia’s State Elections Buys Anwar Breathing Space
- Malaysians in six states cast votes in state elections that were seen as an early referendum for the government of Anwar Ibrahim, in particular of its support among Malay voters.
- Anwar’s coalition did well enough to ensure his government’s viability, with a virtual tie in terms of control of state governments and the popular vote.
- His coalition is likely to remain intact and a lull in the electoral calendar gives it room to pursue its domestic and foreign policy agenda.
The Energy Cable #33 – The handoff – From positioning to fundamentals
- Steno Research: Stubbornness despite Chinese demand woes As China’s economic woes deepen with the housing market slumps, we note that the demand side in the energy space looks just as fragile as the supply side.
- Sure, China might be taking advantage of the Russian discount, but the Ruble is down some 30% against the CNY year-to-date so it is not catching a bid that one would otherwise expect.
- With Country Garden (potentially) defaulting on fixed-income payments expect more weakness to show up in CNY pairs, which in turn adds even weaker commodity demand from China.
UK: Jobs Melt with Wages Burning Hot
- Another surprise 0.2pp jump in the UK unemployment rate to 4.2% in June suggests the labour market suffered even before the BoE’s panicked 50bp hike.
- Weakness still looks genuine to us, with 0.1pp monthly steps as the current underlying trend. However, underemployment and job vacancy data haven’t softened recently.
- The tightness and second-round effects stoked another wage surge, which the BoE needs to break. This inflation pressure should encourage a 25bp hike in September.
China Watch: The People’s Bank Pickle – is 7.30 the line in the sand?
- Conclusions up-front: – As the PBoC confronts Yuan depreciation and counters deflationary momentum, the continued divergence between these challenges will strain the central bank’s ability to effectively manage both – Whatever policy trajectory PBoC chooses there will be uncomfortable trade-offs – We remain confident that the PBoC will defend the Yuan at the 7.30 levelIn light of the ongoing measures taken by Chinese authorities to tackle issues within the real estate sector, the recent rate cuts announcement, along with discouraging concrete data and the persistent depreciation of the Yuan, we find it pertinent to examine the existing state of monetary policy in China:PBoC is essentially caught between a rock and a hard place if the current headwinds keep mounting.
- Eventually, they could be forced to pick a side between two objectives:On one hand, China is dealing with a declining nominal demand problem which is reflected in the depressed CPI.
- That is what last night’s rate cuts are designed to address.
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