Chinese consumer price inflation falls below zero

OVERNIGHT

Asia-Pacific equity markets are mostly down this morning following declines in European and US markets yesterday. China CPI data for July showed the annual rate of inflation below zero for the first time since February 2021, although core inflation was up from June. The data was close to expectations but nevertheless will probably further fuel calls for the Chinese authorities to consider new measures to stimulate growth. US Federal Reserve policymaker Harker said that he favours interest rates being unchanged in September unless there is a considerable upside surprise in upcoming data but doesn’t see the need for early interest rate cuts.

THE DAY AHEAD

The rest of today is set to be very quiet with no economic data releases of note in the UK, US or the Eurozone and no speeches scheduled from economic policymakers. However, that doesn’t necessarily mean that markets will be in a summer lull mood. As we noted in yesterday’s daily, the central bank updates from the Bank of England, the European Central Bank and the US Federal Reserve all left it uncertain whether interest rates will rise any further in the autumn but also made it clear that those decisions will be very dependent on economic data.

That means that market participants are likely to be watching upcoming data even more closely than is usually the case in the runup to the next set of economic policy meetings at the ECB (14th September), the Fed (20th September) and the BoE (21st September). As things currently stand, markets are attaching about an 84% probability to another UK rate hike in September but lower probabilities to increases from the ECB (36%) and the US (12%). However, those could change sharply depending on incoming data with resulting significant fluctuations in financial markets. Note, for example, the big moves in US Treasury bond yields before and after last Friday’s US labour market report.

So while today’s calendar is light, markets will be looking forward to tomorrow’s US CPI inflation data. This is the first of two US inflation reports to be released before the next US monetary policy announcement that will be highly important in determining whether the Fed raises interest rates again. That will be followed on Friday by another significant release in UK GDP. Moreover, looking into next week, a busy calendar includes UK reports for inflation and the labour market which will be key inputs into the BoE’s next rate decision. 

MARKETS

US Treasury yields fell yesterday and slipped further overnight as the focus remains on hopes that the Fed will refrain from further interest rate hikes in the autumn. Bond yields also declined yesterday in both the UK and the Eurozone. Currency moves have generally been modest but in early trading this morning sterling is up slightly against the US dollar but down versus the euro.