Are China’s inflation, capital flows tides turning?

March 11 – A look at the day ahead in Asian markets.

Signs of fatigue on Wall Street and mixed Chinese inflation data will set the tone for Asian markets on Monday, with growing expectations of a landmark policy change later this month from the Bank of Japan also likely to drive the Nikkei and yen.

Asia’s economic calendar is light, with only the final reading of fourth-quarter Japanese GDP on tap. A Reuters poll suggests the economy avoided a technical recession thanks to stronger-than-expected corporate spending on plants and equipment.

Inflation data from China on Saturday showed that consumer price inflation was notably higher than expected, but producer price deflation accelerated once again.

Annual consumer inflation rose to 0.7%, the highest in almost a year and a sign that the economy is reflating and the battle against deflation may be turning in policymakers’ favor.

But the producer price index fell 2.7% year-on-year, more than forecast and the 17th consecutive month that prices have declined on an annual basis. Pipeline price pressures remain negative.

Deflation is one of investors’ biggest concerns over China. Bubbling U.S.-Sino trade tensions is another, and on Friday Bloomberg reported that Washington is weighing sanctions on several Chinese tech companies, including chipmaker ChangXin Memory Technologies, in a bid to further restrain China’s development of advanced semiconductors.

Capital has flooded out of China for some time, but analysts at the Institute of International Finance say this tide may be turning – China posted its first equity inflow in six months in February and its largest in over a year.

Trading in the Japanese yen, meanwhile, is intensifying as the BOJ’s March 18 to 19 policy meeting draws closer and speculation mounts that it will bring down the curtain on years of ultra-loose policy and negative interest rates.

The yen last week registered its best week since July, rising 2% against the dollar. On the other side of the dollar/yen exchange rate, traders now see the Fed cutting rates in June.

Dollar/yen could have more room to fall, if hedge funds and speculators continue to cover their short yen position, which was the largest in six years at the end of February. Data shows that funds trimmed this by around 10% in the week to March 5.

The global backdrop to the Asian open on Monday is mixed. On the one hand, signs are pointing to U.S. and euro zone rate cuts starting in June. But on the other, there are signs that the remarkable rally on Wall Street is running out of steam.

The S&P 500 and Nasdaq ended lower last week. It may have been only the third weekly decline in 19 for both, but it came despite a notable decline in Treasury yields and the dollar’s biggest weekly loss this year.

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

– Japan GDP (Q4, final)

– Japan money supply (February)

– U.S. 3-year bond auction

(By Jamie McGeever; Editing by Josie Kao)

Global market sunshine to pierce China clouds

March 8 – Trading in Asia on Friday is shaping up to be a battle between global market strength on one side, and local caution on the other, particularly surrounding the two regional powerhouses China and Japan.

US, European, and world stocks as measured by the MSCI All-Country index roared to record highs again on Thursday, spurred by – what else? – another surge in chip stocks. Hopes that the Fed and ECB could soon start cutting rates also boosted sentiment.

New highs for the S&P 500 and Nasdaq, a weaker dollar, and lower US Treasury yields should be a positive cocktail for Asian stocks. The MSCI Asia ex-Japan index will have its seventh weekly rise in eight if it avoids a 1% decline on Friday.

But concern over China’s economy and deepening US-Sino trade tensions are never far from the surface, and they bubbled up again on Thursday.

In Japan, meanwhile, the Nikkei slumped 1% after the yen clocked its biggest rise of the year on mounting speculation that the Bank of Japan could end negative interest rates as soon as this month.

The Nikkei has touched record highs recently so some profit-taking is to be expected. Similarly, US futures market data show speculative short positions in the yen are the largest in six years, so a bout of short covering was always likely.

Japan dominates the Asian economic calendar on Friday, with the latest household spending, bank lending, trade, and current account data all scheduled for release.

The news flow around China over the last 24 hours hasn’t been particularly bullish for asset prices.

S&P Global warned that China’s credit rating could be cut if its economic recovery remains weak or is driven largely by extensive stimulus. S&P last downgraded China in 2017 but rival agency Moody’s put Beijing on a downgrade warning in December.

Beijing is fighting deflation, a property sector crash, and slowing growth. The sums needed to turn all that around, as well as bail out indebted local governments, are extremely high.

On the trade front, three US Senate Democrats from auto manufacturing states on Thursday urged the Biden administration to hike import tariffs on Chinese electric vehicles, the latest push by lawmakers to protect the US auto sector.

With pressure growing on the White House to take further steps to prevent Chinese vehicle imports, the US House Energy and Commerce committee approved legislation to vote on legislation giving China’s ByteDance six months to divest from short video app TikTok or face a US ban.

This is the backdrop to IMF Managing Director Kristalina Georgieva and First Deputy Managing Director Gita Gopinath’s planned visit to Beijing later this month to meet with Chinese authorities and attend economic conferences.

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

– Japan household spending (January)

– Japan trade and current account (January)

– Taiwan trade (February)

(By Jamie McGeever; Editing by Josie Kao)

Yields on 10-year notes dip before jobs data

March 7 – Benchmark 10-year US Treasury yields dipped on Thursday but came off of one-month lows reached earlier in the day before highly anticipated US jobs data on Friday that may offer new clues on Federal Reserve policy.

The employment report for February is expected to show that employers added 200,000 jobs during the month.

It comes after unexpectedly strong jobs and inflation reports for January, which were attributed in part to seasonal factors.

Benchmark 10-year yields have fallen from almost three-month highs reached last month as investors price for the likelihood that the US central bank is getting closer to rate cuts.

“As we creep forward towards the first set of Fed rate cuts later this year, I expect yields to move a little bit lower,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

Fed Chair Jerome Powell said on Thursday in his second day of testimony to Congress that the US central bank was “not far” from gaining the confidence it needs in falling inflation to begin cutting interest rates.

That echoes his comments on Wednesday that interest rate cuts are still likely in coming months
but only if warranted by further evidence of falling inflation.

Yields fell after Powell’s statement on Wednesday as investors unwound hedges that were placed in case he took a more hawkish tone.

“There was a prospect that Powell could come out slightly more hawkish after January’s high inflation print, but he largely ignored it,” LeBas said.

Consumer price inflation for February due on Tuesday will be watched for signs that January’s larger-than-expected uptick in prices was an anomaly.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits was unchanged last week, though continuing claims rose to the highest level since last November.

Benchmark 10-year yields were last down one basis point on the day at 4.092%, after earlier reaching 4.054%, the lowest since Feb. 5.

Two-year yields fell 5 basis points to 4.514%. The inversion in the yield curve between two-year and 10-year notes narrowed by three basis points to minus 42 basis points.

Fed funds futures traders are pricing in a 72% probability the Fed will begin cutting rates in June, according to the CME Group’s FedWatch Tool.

Treasury yields fell earlier on Thursday after the European Central Bank (ECB) left interest rates unchanged as expected on Thursday but acknowledged that inflation is easing faster than once thought, potentially opening the way for rate cuts later this year.

That sent European bond yields lower, with markets now pricing in over 100 basis points rate cuts by the ECB this year.

Treasury yields were “following the move in Europe,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York. “It was kind of a dovish signal from the ECB.”

The US Treasury Department said on Thursday it will sell USD 117 billion in coupon-bearing supply next week, including USD 56 billion in three-year notes on Monday, USD 39 billion in 10-year notes on Tuesday, and USD 22 billion in 30-year bonds on Wednesday.

The amount banks and fund managers lent to the Fed in its reverse repurchase agreement facility dropped to USD 436.75 billion on Thursday, the lowest since mid-2021.

(Reporting By Karen Brettell, Editing by Franklin Paul and Diane Craft)

Fed’s Powell: “Not far” from confidence needed to cut rates

WASHINGTON, March 7 – Federal Reserve Chair Jerome Powell said on Thursday the US central bank was “not far” from gaining the confidence it needs in falling inflation to begin cutting interest rates.

“I think we are in the right place,” Powell said of the current stance of monetary policy in a hearing before the Senate Banking Committee. “We are waiting to become more confident that inflation is moving sustainably down to 2%. When we do get that confidence, and we’re not far from it, it will be appropriate to begin to dial back the level of restriction so that we don’t drive the economy into recession.”

The comment showed Powell’s faith that recent higher-than-expected inflation readings and other strong economic data won’t interrupt the ongoing decline in price pressures that took root last year.

The Fed chair has been reluctant to declare the inflation battle finished, and cautioned in testimony to the Senate panel, as he did Wednesday before the House Financial Services Committee, that further progress back to the Fed’s 2% target was
not assured.

The most recent data showed headline inflation, as measured by the Fed’s preferred Personal Consumption Expenditures price index, at 2.4%, with a related measure of underlying inflation at a slightly higher 2.8%.

But both have been “coming down sharply since the middle of last year,” Powell said. “We’ve got a ways to go on that, but we’ve made a lot of progress.”

Yields on 2-year Treasury notes fell slightly after Powell’s remarks, and investors firmed bets that an initial Fed rate cut would occur in June.

The central bank next meets on March 19-20, and will issue a new policy statement as well as updated rate and economic projections that should shed more light on policymakers’ expectations for the year.

Powell’s appearance before the Senate committee and a House panel on Wednesday, as is often the case in the twice-yearly round of hearings, was dominated less by monetary policy and more with an ongoing debate about Fed bank regulatory proposals, as well as a host of other issues, including housing policy and whether the Fed would issue a central bank digital currency.

But Powell’s update on monetary policy kept intact the sense that the central bank is nearing the point where the current policy rate of interest, held at a more than 20-year high since July in a range between 5.25% and 5.5%, will be lowered in the months ahead.

Pressed at the start of the hearing by the panel’s chair, Ohio Democrat Sherrod Brown, on why the Fed was not quicker to cut rates “to prevent workers from losing their jobs,” Powell said that was a top-of-mind concern, while nodding also to the economy’s resilience.

“We’re well aware of that risk, of course, and very conscious of avoiding it,” Powell said. “If what we expect and what we’re seeing – continued strong growth, strong labor market, and continuing progress in bringing inflation down – if that happens, if the economy evolves over that path, then we do think that the process of carefully removing the restrictive stance of policy can and will begin over the course of this year.”

(Reporting by Howard Schneider; Editing by Andrea Ricci)

Gold scales new record peaks as rate cut bets burnish appeal

March 7 – Gold raced to an all-time high on Thursday, extending its record run this week as increasing bets for US monetary easing added to sustained tailwinds for bullion from central bank buying and safe-haven demand.

Spot gold was up 0.4% at USD 2,156.93 per ounce as of 02:00 p.m. ET (1900 GMT), hitting a record high of USD 2,164.09 during the Asian trading hours.

US gold futures settled 0.2% higher at USD 2,165.2.

Powell said the Fed is “not far” from getting enough confidence that inflation is heading to the Fed’s 2% goal to be able to start interest-rate cuts.

Traders are now pricing in a 74% chance of a June rate cut, versus around 63% on Feb. 29, the CME’s Fedwatch Tool showed.

A low-interest rate environment translates into reduced opportunity cost of holding non-yielding gold and weighs on the dollar, making bullion cheaper for overseas buyers.

Rate cut bets are driving gold prices and everyone is expecting they will come, said World Gold Council market strategist Joseph Cavatoni.

Central banks’ gold purchases also continue to be very strong, Cavatoni added.

Further market direction could come from Friday’s US non-farm payrolls report.

In physical markets, the price surge was expected to dampen consumption during the Indian wedding season, but top buyer China could see robust safe-haven demand.

Geopolitical risks are also the major driver for bullion, said James Steel, precious metals analyst at HSBC.

“We only have a narrow group of assets that investors can really call safe haven, and gold is number one amongst them.”

Bullion has climbed over USD 300 since the start of the Israel-Hamas war.

However, the latest rally in gold has come alongside a rally in riskier assets.

Silver added 0.6% to USD 24.31, while platinum climbed 1.3% to USD 919.00 per ounce.

Palladium slipped 0.5% to USD 1,037.00 after surging as much as 12% on Wednesday.

(Reporting by Anjana Anil and Anushree Mukherjee in Bengaluru; writing by Arpan Varghese; editing by Shinjini Ganguli, Tasim Zahid, and Shweta Agarwal)

Hedge funds snap up stocks at fastest pace in 11 months, Goldman says

HONG KONG, March 7 – Hedge funds piled into global equities at the fastest pace in almost a year in February as investors become more bullish on stock markets from the US to Japan, Goldman Sachs said.

The significant boost in hedge funds’ net purchases of equities was observed across all major regions worldwide last month, marking the strongest monthly net inflow from these funds into global stocks since March 2023, Goldman Sachs said in a note from their prime services team dated March 6.

The note didn’t give details of the purchase volume.

Global equity markets have been buoyant as markets prepare for imminent Federal Reserve interest rate cuts and a boom in the tech sector. The MSCI World Index has been rising for four months in a row.

Hedge funds’ risk appetite is rising rapidly, with gross leverage level hitting fresh record highs recently, Goldman Sachs said.

By region, hedge funds switched to net purchase of US stocks for the first time in seven months, Goldman Sachs said, spurred by extended wagers on semiconductor-related equities driven by the artificial intelligence (AI) boom.

Yet, the inflow into the “Magnificent 7”, the largest US companies by market value, such as Apple and Nvidia, “collectively is little changed so far this year,” the bank said, adding that fund managers preferred smaller tech companies.

Interest in Asia is also recovering, led by Japan. Japan recorded the largest hedge fund net buying in eight months as the Nikkei soared to all-time highs, according to Goldman Sachs.

Japanese stocks have soared through 2023 as the world’s fourth-largest economy shows signs of emerging from deflation and companies take steps to improve governance.

Net allocation to Japanese stocks returned to above 5-year averages “but remains well below historical peak levels,” Goldman Sachs said, suggesting more room for the market rally.

Meanwhile, Chinese equities also attracted net buying for a third straight month while net allocation to Europe and emerging markets ex-China rose to about 5-year highs, Goldman Sachs said.

(Reporting by Summer Zhen; Editing by Jacqueline Wong)

Gold extends rally to record as Powell hints at rate cut in 2024

March 7 – Gold prices surged to a record high on Thursday, poised for their seventh consecutive daily rise, led by sluggish U.S. economic data and Federal Reserve Chair Jerome Powell’s indications of potential rate cuts in the coming months should inflation alleviate.

Spot gold rose 0.3% to USD 2,155.42 per ounce, as of 0723 GMT. US gold futures added 0.2% to USD 2,163.10.

Bullion continued its record-breaking rally, reaching an all-time high of USD 2,161.09 earlier in the session and looked set for its longest intra-day winning streak since at least November 2021.

The marginal weakness in US data gave gold a reason to rally, yet the magnitude of movement appears disproportionately large, possibly influenced by large futures buying that commenced on Friday, Marcus Garvey, head of commodities strategy team at Macquarie, said.

Gold got a boost on Wednesday after Powell indicated that interest rate cuts were likely in the coming months “if the economy evolves broadly as expected,” along with further evidence of falling inflation. Powell will speak again later in the day.

Lower rates boost the appeal of non-yielding bullion.

Powell’s remarks, coupled with data released the same day indicating a softening of labour market conditions, resulted in US Treasury yields and dollar sliding, increasing the appeal of gold.

If Friday’s labour market data or next week’s inflation data shows any weakness, USD 2,300 would be the short-term target based on technical levels, but that would be fairly a short-lived phenomenon, before prices correct and consolidate, Macquarie’s Garvey said.

“We expect central bank buying to continue on the back of geo-political uncertainty. Slowdown in China will keep global growth contained. Hence, in an uncertain financial environment, gold will remain safe investment for banks,” said Jigar Pandit, head of commodity and currency business at BNP Paribas’ Sharekhan.

Spot silver fell 0.4% to USD 24.08, while platinum dipped 0.3% to USD 904.83 per ounce, and palladium slipped 1.5% to USD 1,026.80, after surging more than 12% in the last session.

(Reporting by Harshit Verma in Bengaluru; Additional reporting by Swati Verma; Editing by Janane Venkatraman and Dhanya Ann Thoppil)

Oil prices hold gains on upbeat China trade data

SINGAPORE, March 7 – Oil prices held steady on Thursday, holding onto overnight gains after upbeat Chinese trade data and after US data showed a smaller-than-expected rise in crude inventories and large draws in fuel stocks.

However, expectations that US interest rate cuts could be delayed capped gains.

Brent crude futures slipped 8 cents to USD 82.88 a barrel by 0736 GMT, while US West Texas Intermediate crude futures CLc1 inched down 7 cents to USD 79.06 a barrel despite China’s import and export growth beating estimates.

“China’s trade balance data is a positive sign for the oil market’s demand outlook,” Auckland-based independent analyst Tina Teng said.

However, she added that risk-off sentiment dominated financial markets as stocks are retreating on Wall Street.

The world’s top crude importer posted a 5.1% rise in imports in the first two months of 2024 from a year earlier to about 10.74 million barrels per day (bpd), customs data showed on Thursday, as refiners ramped up crude purchases to meet fuel sales during the Lunar New Year holiday.

China’s January-February refined products exports dropped 30.6% on year to 8.82 million tons, reducing supplies for global markets.

Upbeat trade data from China, the world’s second-biggest economy, suggests global trade is turning a corner in an encouraging signal for policymakers as they try to shore up a stuttering economic recovery.

Brent and WTI edged up about 1% on Wednesday after crude inventories rose for a sixth week in a row, building by 1.4 million barrels, about two-thirds of the 2.1 million-barrel rise analysts had forecast in a Reuters poll.

Gasoline and distillate stocks fell more than expected, the EIA data also showed.

A strong US dollar will maintain the status quo in the near term, as markets brace for a risk the US Federal Reserve’s first interest rate cut gets delayed to the second half of this year, according to a Reuters poll of foreign exchange strategists.

Fed Chair Jerome Powell said continued progress on inflation “is not assured”, though the U.S. central bank still expects to reduce its benchmark interest rate this year.

(Reporting by Florence Tan in Singapore and Arathy Somasekhar in Houston; Editing by Tom Hogue and Raju Gopalakrishnan)

Selloff, what selloff? Markets back in their groove

March 7 – As you were.

Asian markets are set for a positive open on Thursday following a widespread ‘risk on’ move on Wednesday, while investors in the region await trade figures from China and Australia, and an interest rate decision from Malaysia.

Global stocks and risk assets on Wednesday shrugged off the previous day’s jitters and resumed their climb higher while US bond yields drifted lower, after Federal Reserve Chair Jerome Powell kept the door open to interest rate cuts later this year.

If Powell’s goal was to play a straight bat in his three hours of questioning from US House of Representative lawmakers on Wednesday and avoid any market ructions, he more than met it.

The MSCI Asia ex-Japan index had already risen 0.77% on Wednesday before Powell spoke, its biggest rise in two weeks. The dollar slide, lower bond yields and rise on Wall Street after his testimony should give regional sentiment a further boost on Thursday.

The main economic indicator in Asia on Thursday is Chinese trade. Beijing this week said it is aiming for GDP growth this year of around 5% again, but many analysts are skeptical – the performance of imports and exports in recent months suggests trade will not be a major driver.

Export growth likely slowed in the January-February period, suggesting manufacturers are still struggling for overseas buyers and in need of further policy support at home.

Data for the January-February period is expected to show exports grew 1.9% year-on-year in US dollar terms compared with 2.3% growth in December, according to a Reuters poll, while import growth accelerated to 1.5% from 0.2%.

Several Asian countries publish their latest foreign exchange reserves holdings on Thursday. At the last count, the six jurisdictions – China, Japan, Hong Kong, Malaysia, Indonesia and Singapore – held a combined USD 5.55 trillion, nearly half of the global total.

China and Japan are the world’s largest holders with USD 3.22 trillion and USD 1.29 trillion, respectively. Changes in FX reserve holdings are very small, but China’s numbers in particular are always closely watched.

Malaysia’s central bank, meanwhile, announces its latest interest rate decision. Bank Negara Malaysia (BNM) is expected to leave its overnight policy rate (OPR) unchanged at 3.00% and hold it there until at least 2026 as inflation was expected to pick up, a Reuters poll found.

Although inflation eased to 1.5% in January, having peaked at 4.7% in August 2022, economists expect price pressures to rise in the second half of this year, suggesting a rate cut from the central bank was unlikely anytime soon.

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

– China trade (February)

– China, Japan FX reserves (February)

– Malaysia interest rate decision

(By Jamie McGeever)

Dollar falls as Powell says Fed is on track to cut rates this year

NEW YORK, March 6 – The dollar slipped across the board on Wednesday after Federal Reserve Chair Jerome Powell said continued progress on inflation “is not assured,” though the US central bank still expects to reduce its benchmark interest rate later this year.

“If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in remarks prepared for delivery to the House Financial Services Committee.

The euro was 0.37% higher against the dollar at USD 1.0897, after strengthening to USD 1.09155, its highest since Feb. 2.

“Fed Chairman Powell’s opening statement to Congress essentially repeated the same main points that he and his colleagues have been hitting for months,” Matt Weller, head of market research at StoneX, said.

But Powell’s words disappointed traders, who in recent weeks had begun to speculate that the Fed would back away from any potential rate cuts in the first half of the year, Weller said.

“With Fed Chairman Powell refusing to endorse that possibility, some forward-thinking traders have reversed bullish bets on the greenback from the past couple weeks,” he said.

Powell will appear before the Senate Banking Committee on Thursday.

The dollar index, which measures the currency’s strength against a basket of six currencies, was down 0.41% at 103.36. The index had climbed as high as 104.97, up about 3.6% for the year, in mid-February, helped by robust US economic data, but has retreated as recent reports showed some softness.

Data on Wednesday showed US private payrolls rose slightly less than expected in February, while wages for workers remaining in their jobs increased at the slowest pace in 2-1/2 years, consistent with a cooling labor market. The Labor Department’s more comprehensive and closely watched February employment report is due on Friday.

“Job openings and ADP private payroll data keep the path open for Fed rate cuts later this year,” Bill Adams, chief economist for Comerica Bank, said in a note, citing the report by Automatic Data Processing.

The dollar slipped on Tuesday after data showed US services industry growth slowed last month.

Traders also braced for the ECB’s rate decision on Thursday with the central bank expected to leave its benchmark interest rate at a record 4%, putting the focus on clues about when cuts may begin.

“We think they are going to echo their message again and tomorrow is not going to change the outlook,” Danske Bank’s Mellin said.

Elsewhere, sterling edged up 0.25% to USD 1.2738 as traders digested Britain’s latest fiscal plans, possibly the last budget before an election expected later in the year.

British finance Minister Jeremy Hunt offered no surprises in his latest statement, announcing a two percentage point cut to National Insurance Contributions (NICs), while freezing fuel and alcohol duty.

Bitcoin was up 5.76% at USD 66,963, rebounding from Tuesday’s sharp swoon after it hit a new high. The cryptocurrency’s recent price rise has been fueled by investors pouring money into US spot exchange-traded crypto products and the prospect that global interest rates may fall.

Against the yen, the dollar was 0.45% lower at 149.38 yen on reports that some Bank of Japan board members think it would be appropriate to lift rates from below zero at the March meeting.

Analysts are mostly expecting the BoJ to exit negative rates at the April meeting if Japan’s spring wage negotiations result in solid pay hikes.

The US dollar weakened 0.57% against its Canadian counterpart after the Bank of Canada kept its key overnight rate steady at 5% on Wednesday as expected and said it was still too early to consider a cut, given persistent underlying inflation.

The Australian dollar brushed off gross domestic product growth of a mere 0.2% in the fourth quarter, reinforcing the case for rate cuts. The currency was last up 0.94% at USD 0.6565.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Samuel Indyk and Brigid Riley; Editing by Shri Navaratnam, Lincoln Feast, Sharon Singleton, Emelia Sithole-Matarise, Deepa Babington, and Richard Chang)

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