Asia Morning Bites: China's Stimulus and FOMC Meeting Set Positive Tone for Risk Assets

Asia Morning Bites

China's monetary stimulus and lower US inflation provide a positive backdrop for risk assets ahead of tonight's FOMC meeting.

Global markets: Equities seemed to like the continued decline in US inflation yesterday, as it bolsters the case for a pause from the Fed (next decision at 02:00 SGT Thursday). The S&P500 rose 0.69% yesterday, and the NASDAQ added another 0.83%. Chinese stocks also rose, helped by yesterday’s unexpected PBoC rate cut. Still, despite the lower inflation print, US Treasury yields rose some more – the yield on 2Y notes rose 8.9bp to 4.666%, and the 10Y bond yield rose 7.8bp to 3.813%. Once the Fed is out of the way, and the market has settled, perhaps with an even slightly higher bond yield, this might well feel excessively high, given that inflation for July will probably come in at the low 3% level. EURUSD rose a little yesterday, reaching 1.0789, Other G-10 currencies also made gains, though the JPY continues to look soft at 140.18. The KRW was the standout in Asia yesterday, gapping lower to 1271.50, possibly helped by hawkish comments from the latest BoK minutes. Strong labour data just out will also likely help (see below).

G-7 macro: Yesterday’s US inflation figures for May came out more or less in line with expectations. Headline inflation dropped to just 4.0% from 4.9%, while the core fell a little less, reaching 5.3% (it was 5.5% previously). James Knightley’s note on what this means is worth a close read. But the short version is that it boosts the chances of a Fed pause tonight – even if they indicate further hikes in the dot-plot (we don’t think they will ultimately deliver). US May PPI data due out should add to the case for falling pipeline inflation pressures. UK April industrial production will not make pleasant reading, though the index of services could be a bit stronger. The ECB meets to decide on rates tomorrow. There is a wide consensus for a further 25bp of tightening.

South Korea: The jobless rate unexpectedly fell to 2.5% in May (vs 2.6% in April, 2.7% market consensus). Employment of services such as whole/retail sales, recreation, and transportation, led the improvement. One interesting thing is that job growth in ICT and professional, scientific& technical activities has been particularly strong over the past several months, despite the recent weakness in the semiconductor business. We think this is not directly related to semiconductor manufacturing itself but more related to platform services and software development, including AI technology. We believe that the tech sector has held up relatively well. Meanwhile, the construction industry shed jobs for the second consecutive month, and real estate also cut jobs. We think that despite weakness in manufacturing and construction, service-led labour market improvements have continued, and this probably supports the hawkish tone of the BoK. In a separate data release, import prices dropped significantly to -12.0% YoY in May (vs -6.0% in April), mostly due to falling commodity prices. We expect consumer inflation to decelerate further in the coming months and to reach the 2% range as early as June.

Advertising

Follow ING Economics on social media: