China inflation could spoil the weekend party

June 9 (Reuters) – A big dollar fall, historically low volatility, lower bond yields, and Wall Street on the march with the S&P 500 joining the Nasdaq in the bull market territory – Thursday’s global market moves augur well for a strong end to the week in Asia on Friday.

Any optimism could be punctured, however, by inflation data from China. If they are in line with other indicators lately that show Asia’s biggest economy is sputtering, China’s stocks, bonds, and currency may come under renewed heavy pressure.

Consumer prices are expected to decline 0.1% in May and rise 0.3% year on year. April’s CPI report showed inflation virtually evaporated, highlighting Beijing’s challenge to stimulate enough economic activity and growth to kill the threat of deflation.

It is proving to be a major headache – outright producer price deflation is expected to have intensified in May, with the annual rate of price falls accelerating to 4.3%, according to a Reuters poll. That would be the fastest rate of PPI decline since March 2016.

China’s yuan has been sliding to fresh 2023 lows nearly every day for the past three weeks and the main stock indexes have followed a similar pattern, but it’s a different story elsewhere.

Revised figures on Thursday showed Japan’s economy grew much faster than initially thought over the January-March period, as a post-pandemic pickup in domestic spending and company restocking offset the hit to exports from slowing global demand.

The Japanese yen rallied strongly, also propelled further by a soft US employment indicator to its best day in a month. The weak jobless claims figures torpedoed the dollar more broadly, sank Treasury yields, and cooled Fed rate hike expectations.

This is usually a healthy mix for risk appetite, and so it proved on Thursday. Both the MSCI World index and MSCI Asia ex-Japan indices are on course for their second consecutive weekly rise, something neither has managed since March, and Wall Street jumped.

Remarkably, the main measure of US stock market volatility is at a pre-pandemic low, and implied global FX volatility is its lowest in over a year too. That should give Asian markets the platform for a positive day on Friday.

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

– China CPI inflation (May)

– China PPI inflation (May)

– South Korea current account (April)

(By Jamie McGeever; editing by Deepa Babington)