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A look at the day ahead in European and global markets

By Wayne Cole, Chief Correspondent Treasury

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It’s been a nervy start to the week in Asia as concerns about China’s debt-laden property sector take a toll on stocks and the yuan, which hit its lowest in a month despite a strong fix from the PBOC.

Chinese blue chips lost 1.1%, on top of a 3.4% decline last week. Shares of Country Garden slid more than 12% to all-time lows after the real estate company suspended trading in 11 of its onshore bonds.

A person sits near a construction site of residential buildings by Chinese developer Country Garden, in Beijing, China August 11, 2023. REUTERS/Tingshu Wang/File Photo

Data on bank lending and credit on Friday were just the latest dire reading, though all the chatter about deflation is a bit premature. One month of negative consumer prices is not really deflation, which is defined as a sustained fall in the price level across an economy.

Core inflation actually doubled to 0.8% y/y and the drop in consumer prices was largely driven by year-ago volatility in pork prices. While pork is important in China, it’s hardly the entire economy.

Still, western analysts argue Chinese consumers need to save less and spend more to get the economy moving, and Beijing seems to be taking an almost moral view on consumption, like it’s a sin. That puts the focus on retail sales on Tuesday where a rise of 4.7% is forecast, though a wide range of estimates from +2.8% to +10.8% suggests a surprise is possible.

The same goes for U.S. retail sales on Tuesday where the median is for a 0.4% increase, but BofA is tipping 0.7% based on credit and debit spending in the month. A strong result would presumably be positive for corporate earnings but also challenge the market’s sanguine view on the Fed, where futures are pricing a 70% chance the tightening cycle is over.

That would not be welcome news to Treasuries, which are being forced to cheapen to maintain demand as the government borrows large to fund its $1.6 trillion budget deficit.

Yields on 10-year notes crept up to 4.18% on Monday and within spitting distance of the 2023 top of 4.206%, a break of which would be bearish for a test of last year’s 4.337% high.

With the Bank of Japan keeping JGB yields around 0.62%, the widening spread lifted the dollar to a fresh 2023 peak of 145.22 yen on Monday. Anything above 145.00 risks Japanese intervention, but bulls have their eyes on the top from last October at 151.94.

The dollar is also flying on the Aussie and kiwi and a range of emerging Asian currencies, which are being dumped as proxies for China risk.

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