Chinese Economy Struggling to Generate Inflation

AUD

The Aussie Dollar has lost ground against most majors overnight while the ASX closed -0.5% lower as consumer staples took a -1% hit. Notably yesterday, China’s producer prices sank again in June in the latest sign of a stalled economic recovery. Annual producer prices sank 5.4% in June, a ninth-straight decline and the steepest since December 2015, while consumer prices were unchanged. “PPI deflation is expected to ease in the second half of the year, partly because infrastructure spending should put a floor under commodity prices” added Capital Economics’ Zhichun Huang. Later this morning we’ll see NAB Business Confidence data. No projections have been posted and volatility is rarely seen in the aftermath. All in all, we’re set for a quiet week ahead in terms of economic data.

USD

AUDUSD has recovered most losses made in the past 24h, having bottomed out at 0.6625 in the overnight session before opening at 0.6675. Wall St remained in positive territory until the close, with the Dow Jones +0.6%, S&P 500 +0.3% and NASDAQ +0.2%. The latest and most notable US data release, US payrolls figures for June, was a little softer than expected, although the labour market likely remains too tight for the Fed to backtrack on a July hike. After all, the headline figure was solid (Non-Farm Payrolls + 209k), wages remain elevated while the unemployment rate edged lower, raising fears of wage-driven price pressures. Looking ahead, the big risk event this week is the June inflation report. Owing to the fact that last June’s +1.2% surge drops out of the 12-month comparison, the year-over-year rate is expected to drop from +4.0% (last month) to +3.1%. The core reading is also expected to fall by -0.1% to +0.3% m/m, providing support to the disinflationary story, although unlikely enough to tweak the Fed narrative or convince markets to price out a July hike.

EUR

AUDEUR trades lower this morning, having reached a trough at 0.6052 before opening at 0.6066, while the DAX and CAC gained +0.4% respectively. On the Euro front, markets will watch tonight’s ZEW Index (German sentiment measure) given the recent series of disappointing forward-looking measures in the Eurozone. The figure is expected to fall by 2.2 to -10.7, while volatility is usually witnessed if expectations are missed. A quiet week in terms of data, with markets still pricing in 2 more hikes from the ECB by year-end.

GBP

AUDGBP has fallen to near-3-year lows at 0.5177, despite sentiment around the UK economy continuing to deteriorate. Robust wage growth, a tight labour market and expectations of further tightening (the swaps market currently has 125bps of hikes discounted for H2 2023) have all contributed to renewed recessionary concerns among economists, having been revised-away only a few months ago as the economy appeared to have reached a turning point. With a month to go until the Bank of England’s next meeting, and no monetary policy commentary from BoE Governor Bailey last night, the focus will remain on regular pay growth and inflation data. Tonight’s Claimant Count Change should also provide insight, with the 20.5k additional UK citizens expected to have claimed unemployment benefits in June, up from the -13.6k decline in May.

NZD

AUDNZD has furthered recent declines to open at 1.0746. Nothing on the table today, while the RBNZ is expected to leave interest rates unchanged at 5.5% tomorrow, despite lingering concerns inflation may have a sting in its tail. Deputy Governor Christopher Hawkesby said in May that there would be ‘a high bar’ for the central bank to resume rate rises, while ANZ Chief Economist Sharon Zollner said anything other than a pause would come as a great surprise.