Nikkei elation, Chinese deflation

Jan 12 – Japan continues to set itself apart from the rest of Asia – and the world – with the Nikkei breaking through 35,000 points to a fresh 34-year high, while market sentiment across the region on Friday could be set by the latest Chinese inflation data.

Chinese producer price inflation and trade figures, as well as bank lending, trade and current account data from Japan, and industrial production and consumer inflation from India, will also set the tone for the final day of the first full trading week of 2024.

Asian shares on Thursday snapped a seven-day losing streak – the longest since August – but the MSCI Asia Pacific ex-Japan index will have to rise almost 1% on Friday to avoid a third consecutive weekly loss.

No such worries for Japan’s Nikkei. It is up 5% this week, on track for its best week since March 2022, and trading above 35,000 points for the first time since February 1990.

You could say that’s a lost 34 years, an indication of just how deep the damage from the late 1980s bubble has run. On the other hand, it hasn’t done too badly since hitting a low of 7,000 points in March 2009.

Meanwhile, key Asian economic indicators are due for release on Friday, not least producer and consumer price index figures from China, where attention will also be turning towards the presidential elections in Taiwan on Saturday.

Chinese PPI has been running negative on a year-over-year basis every month since October 2022. That is expected to have continued into December, with annual PPI inflation seen slowing to -2.60% from -3.0% in November.

Consumer prices have been drifting in and out of deflationary territory for several months too. November’s annual rate of -0.5% was the lowest in three years, and figures on Friday are expected to show that the pace of price declines slowed marginally to -0.4% in December.

Deflation remains a bigger risk in China than inflation. With economic activity struggling to properly recover from the pandemic-related shutdowns, pressure on Beijing to inject substantial fiscal and monetary stimulus will persist.

Trade activity is expected to have picked up in December year-on-year from November, especially exports. But recent data from Taiwan and Japan – two of China’s largest trading partners – suggest caution is required here.

In India, industrial production and inflation will be released.

This week, HSBC’s fixed income team said India is their top pick for emerging market local sovereign debt in 2024. They reckon the fair value for the Indian government’s 10-year bond yield is 6.50-7.00% – it is currently 7.17% – and expect foreign demand for the paper will rise this year.

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

– China CPI, PPI, trade (December)

– India CPI (December)

– Japan trade, current account (November)

(By Jamie McGeever)