China still busy exporting disinflation

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 down day for Asia as it catches up with the post-payrolls fallout on Wall Street, with the Nikkei losing another 1.7% on top of last week’s nearly 6% slide.

At least S&P 500 futures have recouped early losses to trade up 0.3% and European equity futures are modestly firmer ahead of an all-but-certain rate cut from the ECB on Thursday. Treasury yields have come off their lows, while the dollar has regained some ground on the safe-haven yen.

A customer scans a QR code to pay for vegetables at a morning market in Beijing, China August 9, 2023. REUTERS/Tingshu Wang

Not helping the mood were misses for Chinese inflation data where producer prices dropped 1.8% against forecasts for a 1.4% fall. CPI rose an annual 0.6% in August and almost all of that was food, with goods prices up just 0.2%.

All this is positive for continued global disinflation, but hardly smacks of a long-awaited recovery in demand at home and Chinese blue chips fell 1.3%.

The U.S. CPI report for August comes out on Wednesday and forecasts are for the headline figure to slow to 2.6%, the lowest since March 2021 and a world away from the peak of 9.1%. The range of forecasts also runs from 2.4% to 2.6%, suggesting the risk is to the downside.

A soft outcome would encourage calls for the Federal Reserve to cut by 50 basis points next week, which futures currently price at a 31% chance. A move of 25 basis points is 100% priced, with 112 basis points implied by Christmas.

Fed speakers on Friday did not sound overly keen on an outsized cut, with Governor Christopher Waller suggesting he would only advocate “front-loading” easing if “subsequent” data showed weakness in the labour market. There is little in the way of major jobs data between now and Sept. 18.

The August U.S. unemployment rate of 4.2% and jobs growth of 142,000, released on Friday, were hardly recessionary, although the downward revision of 86,000 to the prior two months has markets assuming August will get revised down as well. The three-month average also slowed to 116,000, which is well short of the 200,000-odd needed to meet growth in the labour force and stop the jobless rate from rising.

An added wrinkle for the Fed is that their Nov. 7 meeting comes just two days after the U.S. presidential election and it might not be entirely clear by then which side has won. Deciding on whether to go by 50 bp in such a politically charged environment could be a tough call.

That just underlines the stakes for the debate between Harris and Trump on Tuesday evening.

Graphics are produced by Reuters.

Graphics are produced by Reuters.

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