Daily Brief Macro: Ending Deflation in China: Currency Appreciation Can Support Economic Rebalancing Towards Consumers and more

In today’s briefing:

Ending Deflation in China: Currency Appreciation Can Support Economic Rebalancing Towards Consumers
Are Negative Divergences Necessarily Bearish?
Is “Transitory Disinflation” Here to Stay?

Ending Deflation in China: Currency Appreciation Can Support Economic Rebalancing Towards Consumers

China experienced deflation following the Asian and global financial crises. Western commentators fear that China will fight deflation with a weaker currency that undermines trading partners, including the US.
China’s reliance on a weak currency to promote economic development has been detrimental to households, while currency appreciation will help structural rebalancing by boosting household spending and reduce deflationary pressures.
Yuan appreciation could increase global economic stability by forcing the US to be less fiscally profligate. Trade tensions with the US will also be lowered if China accepts yuan appreciation.

We are long-term bullish on equities, but the stock market may be vulnerable to a setback in the short run as negative divergences are appearing everywhere.
These divergences could resolve in a sideways consolidation and rolling correction, or a sudden downdraft marked by a spike in price volatility.
The NVIDIA earnings report in the coming week could be pivotal to the near-term market outlook.

The hotter-than-expected January CPI and PPI reports rattled the bond market and expectations of the first quarter-point rate cut have been pushed out from May to June.
Do the stronger-than-inflation reports mean a pivot to a “higher for longer”?
We believe it’s too early to panic over one month’s hot inflation report. The Cleveland Fed’s inflation nowcast shows January core PCE is still showing signs of deceleration at 2.8%.

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