Friday 21 July 2017

Daily Market Update: Fears over Chinese disinflation mount

Shanghai skyline in daytime
Shanghai skyline in daytime

Richard Ramsey

Yesterday’s gloomy Chinese trade data, with imports falling more than anticipated, set the tone for risk appetite within financial markets. This was quickly followed by weaker than expected UK inflation figures and a disappointing German ZEW survey. Yesterday’s German ZEW survey of financial analysts saw investor sentiment plunge in October. The forward looking expectations component fell by more than anticipated and represented the seventh successive month that morale fell. The survey of current conditions also disappointed expectations and fell to a seven month low. Clearly the negative impact of the Volkswagen emissions scandal is now filtering into confidence regarding the Eurozone’s largest economy.

Equity markets reversed some of their recent gains with the S&P 500 and the Euro Stoxx exchanges closing 0.7% and 0.8% lower yesterday. The risk-off tone has continued this morning following the release of more Chinese data. The annual rate of CPI inflation eased from 2.0% in August to 1.6% last month which was below the 1.8% pencilled in by economists. China’s current CPI inflation rate is almost half of the government’s 3% target. Meanwhile China’s period of factory gate deflation (falling prices) extended to 43 months in September. Asian stocks have fallen for a second day following the latest round of data. The Japanese Nikkei 225 closed 1.9% lower this morning and this has spread to European markets with the Euro Stoxx down 1% in early trading. The ongoing economic slowdown in China and emerging markets has hit commodity markets hard. Yesterday the International Energy Agency (IEA) said it expected a “marked slowdown” in oil demand growth as economic activity weakened in countries dependent on oil revenues. This slowdown coupled with higher oil output from OPEC mean that the oil glut will persist in 2016. Brent crude has fallen by another 2% over the last 24 hours to $49.4pb. The oil price has fallen by over 7% ($4pb) in the last two sessions.

The newest member of the Bank of England’s Monetary Policy Committee (MPC), Gertjan Vlieghe, has established himself as one of the rate-setters least likely to vote for an interest rate hike soon. Speaking in front of Westminster’s Treasury Select Committee, Vlieghe warned of the risks from a global economic slowdown. Vlieghe said there was a greater chance that UK inflation would come in below target rather than above it. He added that the Bank should "wait and see" before raising borrowing costs. Vlieghe’s comments followed weaker than expected UK inflation figures. The annual rate of CPI inflation fell into negative territory for the second time this year. The -0.1% y/y print was below the 0% expected by analysts with falling motor fuel prices a key contributory factor behind the downside surprise. Most benefits will be frozen from next April as they are linked to the September CPI figures. Meanwhile the core CPI inflation rate (excludes food & energy) remained unchanged at 1.0% y/y last month. Again this was slightly below the rate anticipated by economists. Today the focus in the UK turns to the labour market. The headline earnings figures will be closely watched as one of the few indicators of inflationary pressure at the minute. Average weekly earnings for the latest period are expected to rise by 3.1% y/y.

Yesterday’s weaker than expected UK inflation figures have weighed heavily on sterling sentiment. Having opened at 74p yesterday morning, EUR/GBP fell just shy of 75p yesterday afternoon before easing back to 74.6p where it currently trades. Sterling has also seen big moves against the dollar with cable falling from $1.539 at yesterday’s open to $1.52. The currency pair has subsequently climbed back above $1.53 this morning. Meanwhile EUR/USD has climbed from $1.137 to $1.141 over the last 24 hours. The dollar was not helped by comments from another Federal Reserve official, Daniel Tarullo, who said that the US central bank should not hike interest rates this year. September’s retail sales figures are the key US release today.

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