Daily Market Digest: China inflation, Japan elections

Market headlines

• China inflation slows to a 5-month low, rising 1.90% in June
• In Japan, Abe wins the parliamentary upper house elections
• Expectations for economic stimulus builds. Nikkei225 jumps over 3%
• Bank of England is the central bank to watch for in Europe as expectations of rate cut builds

Today’s Economic events

• Japan core machinery orders m/m -1.40% vs. 3.10%
• Japan M2 money stock y/y 3.40% vs. 3.40%
• Australia home loans m/m -1.0% vs. -1.90%
• Japan preliminary machine tool orders y/y -19.90% vs. -24.70% previously
• Italy industrial production m/m -0.60% vs. 0.10%
• Eurogroup meetings

Coming Up

• Canada housing starts
• FOMC Member George speech
• US Labor market conditions index

FX Market Performance

China inflation grows at the slowest pace since January

China’s consumer price index rose at a pace of 1.90% in June compared to a year ago. The headline CPI eased following a 2.0% increase in May, data from China’s National Bureau of Statistics showed on Sunday. June’s CPI was however modestly better, rising above economists’ forecasts of 1.80%. Consumer inflation remained below the official 3.0% target this year underlining the weak demand.

Food prices gained 4.60% in June lower than May’s 5.90% increase while non-food prices jumped 1.20% following May’s 1.10% increase. Zhou Hao, senior Asia emerging market economist at Commerzbank in Singapore, said, “In our view, while China reiterates the importance of supply-side reform due to debt and overcapacity concerns, the authorities still need to stimulate demand in order to achieve its growth target.” Zhou said that he expects further policy easing from the PBOC and expects a cut in interest rates and the reserve requirements this month.

The People’s Bank of China (PBOC) has remained in the sidelines after the central bank cut interest rates in October last year. Meanwhile, China’s leaders set an economic growth target of 6.50% – 7.0% in 2016. China’s economy expanded at a pace of 6.90% in 2015 marking the slowest pace of growth in decades.

China’s producer price index fell 2.60% in June compared to a year ago. It was slightly above forecasts of a 2.50% decline. PPI continues to remain negative, falling for nearly 51 consecutive months. Later this week, China’s second quarter GDP data will be released including industrial production data and investment and retail sales. Economists forecast a second quarter GDP growth at 6.70% on a year over year basis.

Abe wins in upper house elections

It was good news for Shinzo Abe’s Liberal Democratic Party (LDP) as the weekend upper house elections saw Abe’s victory. It is being seen as an endorsement for Abenomics, a challenge the Prime Minister has been facing after economic growth stalled despite an increase in stimulus policies. Abe’s LDP and its allies won 78 seats which gives a two-thirds majority. Still, Abe’s LDP failed to win an absolute majority, for the first time since 1989. From the political front, the elections give Abe undisputed control of Japan’s policies.

In his victory speech, Abe said, “We have to accelerate Abenomics to meet the public’s expectations. We will move ahead strongly and I would like to put forward comprehensive and bold economic measures.”

The Nikkei225 index rallied on the open, up 3.98% towards the closing hours of trading. The Japanese yen was also seen trading weaker as speculators expect the further stimulus to be launched. The Bank of Japan meets towards the end of July. After delaying the sales tax hike in May, Abe signaled intentions to launch a new stimulus package in fall. The US dollar opened Monday at 100.625Yen after closing Friday’s session at 100.467.

Adding to the weaker yen is also the Bank of England’s policy meeting this Thursday. Speculators are bracing themselves for more stimulus expansion from the Bank of England. Soichiro Monji, general manager of economic research at Daiwa SB Investments said, “The yen has been driven higher by Japan’s sagging inflation, improved trade balance and the perceived limit on the Bank of Japan’s further easing options” and in the context of the Bank of England, he says “(Market participants) want to maintain short pound/long yen positions until the meeting.”

Italy’s industrial production falls in May

Industrial production in Italy fell unexpectedly in May, data from statistics office Istat showed on Monday. After rising 0.40% in April, industrial production fell to a seasonally adjusted 0.60% on a month over month basis. Economists projected a 0.10% increase in May. On an annual basis, industrial production fell 0.60% in May, compared to a year ago and reversed a 1.80% year over year increase in April.

Production of energy fell 5.90% followed by capital goods which declined 1.50%. The output of industrial goods increased 1.80% on the month. On a year to date basis, Italy’s industrial production grew at a pace of 1.30% compared to the first five months in 2015.

The euro was little changed on the data, but Italy gains attention especially with the banking crisis. It is reported that Italian banks have over 360 billion euro of nonperforming loans and is being tipped as the EU’s next crisis. It is estimated that the Italian government needs to spend as much as 40 billion euro to shore up its weak banking sector that has been hit by bad loans with fears that European authorities could prevent the government from providing support. Banking shares in Italian banks have posted strong declines which many seeing the Italian banking crisis as a result of poor governance and bad lending practices.