There is plenty for Asia to think about today, with the BoJ unchanged, China clamping down on property developers, Australian lockdowns widening, New Zealand inflation ballooning, President Biden in Sino disconnect mode and of course, the delta-variant across Southeast Asia.
Before we get to all of that, though, a quiet look at the US overnight, Chairman Powell held his transitory inflation line in his second day of testimony on the Hill, with Treasury Secretary Yellen backing him up. However, she expressed some disquiet over rising house prices.
US bond yields fell once again, with the curve continuing to flatten, but the US dollar instead surprisingly remained firm, while US stocks retreated. The mixed bag of US data may account for some of the price action. Initial Jobless Claims fell to a pandemic low of 360,000 while the New York Empire State Manufacturing rose to a record high of 43. Industrial and Manufacturing Production slipped, though, as US businesses grapple with supply chain bottlenecks. Therefore, the overall picture remains an inflationary one, and although bond markets seem content with the transitory line, currency markets and stocks are expressing some disquiet, hence the disconnect.
The picture on Capitol Hill is turning murkier by the day and regards to budgets and stimulus packages. I can honestly say I am not sure who on either side is going to vote for what or not, with some competing versions of legislation emerging from both sides. President Biden continued with his Sino disconnect policy, warning US companies about the undermining of the Hong Kong judiciary and doing business there and adding more China tech companies to the US entity list. He also threw a few barbs at Facebook, and the legislative threat to big-tech globally across international jurisdictions just isn’t going away. It is something I have touched on before and may also have weighed on the Nasdaq overnight.
Turning to Asia, President Biden’s comments and actions were never going to set up China markets for a good start, already nervous after middling data this week and government tech-clampdown nerves. China authorities announced today that they would require property developers to disclose commercial paper debt each month, another escalation in China’s deleveraging process for the sector. Geopolitics and domestic clampdowns will continue to cloud investors’ sentiment in China for the rest of the session.
One bright spot was Singapore’s Non-oil Domestic Exports, which shrugged of virus restrictions in June to 6.0% MoM for June, well above forecast. Geographical growth was strong across the board and with the City-state’s vaccination programme moving at a breakneck pace, I am now expecting Singapore to be ASEAN’s outperformer into Q3 and Q4.
Sadly, for the rest of ASEAN, the delta variant continues to wreak havoc across the region and Goldman Sachs today sharply downgraded growth forecasts for the rest of the year. They aren’t the first, and they won’t be the last to do that. Indonesia, Malaysia, Thailand and the Philippines will remain acutely sensitive to a negative shift in investor sentiment, especially if the Fed blinks on inflation later in September.
Despite solid employment data this week, Australian investors may need to swallow some concrete pills into next week as the delta variant outbreak leads Melbourne into a snap lockdown today. Restrictions look set to be tightened further in the greater Sydney region as well. That is weighing on the currency and equity markets today and by association New Zealand markets as well, with the trans-Tasman travel bubble likely to be further shrunk. The lucky country remains lucky; the stream of impressive economic data shows that. But that will change if the restrictions in New South Wales continue, and the next couple of weeks will be vital for Australian asset markets, which have a lot of good news already baked into them.
New Zealand inflation surges
I mentioned New Zealand inflation yesterday, and the release this morning blew expectations out of the water. Inflation rose to 1.30% (0.80 exp) QoQ for Q2, while the YoY number surged to 3.30%. Business PMI, meanwhile, leapt to 60.7. That had bank forecasters scrambling to pencil in RBNZ rate hits starting almost straight away and continuing through 2022. The New Zealand dollar is up 0.50% this morning. The expectations of a much faster and sooner tightening cycle should see the Flightless Bird outperform the Australian dollar and US dollar going forward. Only the Covid-19 situation in nearby(ish) Australia is tempering that rally, I believe.
Finally, the Bank of Japan has just released its latest monetary policy statement, maintaining its 10-year JGB yield target at 0.00% and its short-term rate target at -0.10%. As expected, it has adjusted GDP growth forecast for 2021 and 2022 slightly lower but still expects inflation this year to hit 0.60%, which would be an awe-inspiring feat for Japan. None of the announcements was a surprise, and like many central banks right now, the BoJ is noting both global and domestic risks, especially regarding Covid-19, and waiting to see which way the cards fall. USD/JPY was sharply unchanged on the news.
This evening we see Eurozone Inflation and Core Inflation released, with the former expected to print around 2.0%. That should be right on the ECB’s new “strategy target.” Still, with their inflation forecasts showing a softening over the coming quarters, some monetary policy divergence could be on the cards with the Federal Reserve. Next week’s ECB policy meeting could be the most interesting one for a while, and dovish ECB expectations may go some way to explaining euro’s relative underperformance this week.
The week rounds out with US Retail Sales data. The MoM figure is expected to fall by -0.40%, less than last month’s -1.30%. The risk here is that Americans may well be spending more on reopening services and having fun rather than goods from the shops. As such, a lower number may set US stock markets up for a weak finish to the week.
That’s a lot to cover today. From an Asian perspective, the delta-variant discount still looms large across Asia-Pacific markets. US-Sino relations appear to be taking another turn south which will further erode sentiment. China’s subtle easing measures are also causing some recovery disquiet while its property sector deleveraging and ongoing tech-clampdown has further clouded the picture. The US and Europe may be doing the heavy lifting on the global recovery trade in Q3.