– Antipodeans lead modest rally vs USD, Asian equities up 0.4-1.1%
– Chinese production and investment robust in May, inflation rose to 5.5%yoy
– US retail sales likely to be weak
What to watch for today
USD: Retail sales stall in May. We expect May retail sales to fall 0.3%mom in May, the first drop in 11 months. In particular, supply shortages in the auto sector were likely a significant constraint on auto sales. However, the consensus expects an even larger 0.5%mom drop in sales, so we see some potential for the market to be surprised positively. Moreover, we expect the core ex auto and ex gas reading to be up 0.3%mom after a 0.2%mom gain in April. We continue to look for a more convincing turn in the data heading into July and favor using pressure on risk positions this week to build USD shorts.
GBP: Soft inflation surprise. Our economists forecast that the CPI fell 4.4%yoy in May, slightly below the consensus forecast for an unchanged 4.5%yoy. A softer inflation print would fit with the recent trend of weak data, further undermining expectations of an early hawkish turn in the MPC’s policy stance. Our economists have recently pushed back their call for the first BOE hike to November. We remain bearish on sterling against the euro, yet acknowledge that markets in the near term might need some form of assurance that new financing solutions for Greece do not trigger systemic stress before buying EURGBP with stronger conviction.
INR: Further rise in inflation. Our economists forecast that WPI inflation fell to 8.6%yoy in May, slightly below the consensus forecast for an unchanged 8.7%yoy print. This would still be high relative to the central bank’s desire for inflation to be below 6% and should not stop the 25bp rate hike at this Thursday’s policy meeting that we and the consensus expect.
What happened overnight
Stronger-than-expected Chinese growth data have seemingly given a boost to risk appetite. AUDUSD traded higher to 1.063, with markets shrugging off a very weak NAB business survey. EURUSD has traded back above 1.44 ahead of the European finance ministers meeting on Greece today. No press conference is scheduled, although we may get comments from individual press interviews. USDJPY is stable at 80.2, in line with the fall in 2yr UST yields to 0.39% yesterday. Likewise, Asian currencies are stronger vs the USD, led by the MYR and TWD. Asian equities are up 0.4-1.1%.
CNY: Strong growth data. Growth in industrial output and fixed asset investment remained robust and above market expectations, while retail sales were very modestly below expectations (Exhibit 1). While the slowing of new loans in May’s points to slightly softer data going forward, markets took comfort with the idea that China’s economy is not slowing sharply and that the slowdown may have troughed. CPI inflation was at a three-year high of 5.5%yoy in May, but was in line with our economist’s and the consensus forecasts. The rise in services inflation continues to offset the slowing of momentum in food inflation, but our economist expects headline CPI inflation to peak at about 6% in June. This leads us to expect further hikes in both interest rates and reserve requirements over the next couple of quarters.
JPY: Bank of Japan introduces miniscule new lending program. The BoJ made no changes to its monetary policy settings at today’s meeting save to create a new, albeit tiny, loan facility. The BoJ has added 500bn yen to its existing 3tn yen facility that provides loans to banks at 0.1% for on-lending. The terms of the new facility are easier than for the former, but the impact on the economy is still likely to be minimal, in our view, given that the new program represents only about 0.1% of GDP.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS