China inflation kicks off week with a bang

A clutch of key economic data releases showing whether China is starting to emerge from its post-lockdown funk, and monetary policy decisions – and more importantly, guidance – from New Zealand and South Korea will be the main regional drivers for Asian markets this week.

These come against a slight but potentially significant deterioration in risk appetite as investors grapple with even higher global borrowing costs – most notably U.S. and UK bond yields – and simmering U.S.-Sino trade tensions.

The U.S. second-quarter earnings season moves into gear too, with the tone likely to be set later in the week when some of Wall Street’s biggest names report.

Asian markets, however, continue to underperform. MSCI’s broad Asia ex-Japan index shed 1.5 percent last week, its third consecutive week without rising, and is flat for the year. The MSCI World index is up 11 percent year to date.

Much of that is due to the sluggishness of China‘s markets, and key indicators from the region’s largest economy on Monday will get the trading week underway.

Annual consumer price inflation for June is expected to hold steady at just 0.2 percent, with the monthly rate coming in at 0 percent compared with -0.2 percent in May. As recently as January, annual CPI inflation was running above 2 percent.

Price pressures look set to remain well-rooted in deflation in the coming months. Annual producer price inflation, already the most negative since 2016, is seen falling to -5 percent from -4.6 percent in May.

These figures show the task China‘s central bank and government are facing to reflate the economy. With deflation setting in and growth slowing, it’s little surprise that China‘s stocks, bonds and currency are under the cosh.

Chinese banking stocks, measured by the Hong Kong-listed Hang Seng Mainland Banks Index, plunged 10.5 percent last week. That was the index’s biggest fall in five years and third steepest since it was launched in 2011.

Reflecting just how poorly China‘s post-lockdown economy has performed relative to consensus forecasts, Citi’s Chinese economic surprises index has now fallen 11 weeks in a row. That’s the longest stretch of underperformance since 2010.

U.S. Treasury Secretary Janet Yellen’s four-day visit to China concluded on Sunday with no obvious thawing of relations between the two superpowers. Yellen said her talks with Chinese officials were “direct” and “productive” but they have “significant disagreements”.

The other major regional economic data points and policy decisions this week for investors to get their teeth into include: rate decisions in New Zealand and South Korea; Chinese lending and trade figures; Indian inflation; Singapore’s Q2 GDP report.

Here are key developments that could provide more direction to markets on Monday:

– China CPI, PPI inflation (June)

– Japan current account (May)

– Fed’s Barr, Daly, Mester and Bostic all speak