Modest Chinese Rate Cut

Market movers today

The week is off to a quiet start in terms of data releases with nothing significant in the calendar.

The big data event this week will be on Wednesday when flash PMIs are released for the Euro Area and the US (among others). This release may well set the tone ahead of the September rate meetings in the ECB and the Fed. Risks to growth are a large part of the case for those arguing against an ECB hike even though inflation remains high, following disappointing PMIs in July. For the US, hard data for July has been strong but soft indicators for August have been very mixed, with strong Philly Fed and weak Empire Manufacturing Index. Also a highlight for this week is the Fed’s Jackson Hole Symposium Thursday to Saturday with Powell speaking on the economic outlook Friday.

The 60 second overview

Modest Chinese stimulus: The Peoples Bank of China (PBoC) cut the one-year loan prime rate (LPR) by 10 basis points to 3.45% this morning. Most new and outstanding loans are based on the one-year LPR. This comes after the PBoC unexpectedly cut its medium-term policy rate last week. The cut today was no surprise, although smaller than the 15bps expectation. It was a surprise however, that the five-year LPR, which affects mortgage prices, was left at 4.20%. This probably reflects concerns about a weaker yuan, which has had a tough year. USD/CNY increased somewhat when markets opened.

Euro area inflation: On Friday, the final HICP data looked to confirm what country figures already implied. There seems to be no temporary holiday factors, like tourism, that can explain the continued high core price pressures in July. Hotel prices or package holidays have not been off the charts. It looks like a broad based service price pressure, which supports our call for another ECB hike in September.

Japan: On Friday, we also got Japanese inflation data for July. Core inflation (excluding food and energy) increased to 2.7% from 2.6% in June highlighting some inflation stickiness. Price momentum has been weaker for a few months now though, as food and energy prices have been the key inflation drivers this far. Coupled with a disappointing wage print in June and weak domestic demand in the national account data, the pressure on the BoJ to begin tightening has eased somewhat since the July policy tweak. Overall we see good chances of another tweak to the yield curve control in one of the three remaining meetings for this year. The September meeting, however, is starting to look like a non-event.

Equities: Global equities lower again Friday, though with some more optimism in the US cash session. The turn towards defensive and energy continued without any macro drivers or news out of China to change the recent narrative. In US on Friday, Dow +0.1%, S&P 500 -0.01%, Nasdaq -0.2% and Russell 2000 +0.5%. This week starting basically as the previous one with huge focus on China’s property sector, some small policy adjustments and falling equities. Outside China, a more upbeat tone with most indices being higher. US and European futures are close to unchanged this morning.

FI: Concerns on China sent global yields lower on Friday from the open by 8-9bp in the 10y area. The 5 to 10y area outperformed the short end and the long end of the curve. After the market open reaction, the rest of the day was mostly side-ways trading. This week, focus turns towards PMIs and the Fed’s annual conference in Jackson Hole with Powell and Lagarde both speaking on Friday.

FX: Friday, and last week in general, saw NOK and SEK underperforming other G10 currencies and they have now lost 8% and 7%, respectively vs USD since the troughs in mid-July. EUR/USD has been on a downward trajectory the past month and is currently trading below 1.09. Focus this week is on Jackson Hole speeches including Jerome Powell’s on Friday.

Credit: Last Friday completed a full week of daily widening in credit spreads. Itraxx Main widened 1.6bp to 78.1bp while Xover widened 5.9bp to 430.2bp. The weak tone throughout last week was carried by increased anxiety around the Chinese economy and hawkish signals from central banks. A theme that also drove equities wider. In spite of the bearish backdrop, we saw several primary issues during the week, indicating that the markets are not, by any means, in panic mode.

Danske Bank
Danske Bank
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