China’s prime lending rates unchanged in June

Chris Scicluna

Risk-off in markets as prospect of Fed rate hikes causes further unwind of the reflation trade
The prospect of sooner-than-previously-expected Fed policy tightening caused a further unwinding of the reflation trade on Friday with longer-term bond yields and commodity prices moving sharply lower. With the St Louis Fed’s Bullard mooting a first rate hike as soon as late next year, the 10Y UST fell 6bps to close the week at 1.44% while the 30Y UST fell 8bps to 2.01%. The further slump in longer-dated yields provided little comfort to equity investors, with the S&P500 closing down 1.3%. Steep declines in energy and utility stocks led the index lower, while the flattening of the yield curve did no favours for financial stocks. Meanwhile, the risk-off tone boosted the greenback against most counterparts, but not against the yen.

Markets have reopened with a similar risk-off tone today, with investors now probably awaiting some calming words from Fed Chair Powell tomorrow during his House testimony (in this case, a calming effect that would presumably result in a lift in bond yields). As we write, S&P mini futures are down ¼%, while 10Y and 30Y UST yields have declined further to 1.39% and 1.98% respectively – the latter below 2% for the first time since February. Against that background, it has been a very downbeat start to the week in Asia-Pacific markets with most of the key equity bourses recording heavy losses and bond yields down across the region. The losses have been especially severe in Japan, with the TOPIX slumping 2.4% and the Nikkei225 down 3.3%. Losses of just over 1% were more typical elsewhere, although Australia’s ASX200 declined 1.8% as a flatter yield curve weighed heavily on financials, while stocks are presently down about ½% in China, however, as the onshore yuan weakened to a six-week low against the dollar. In the bond market, the 10Y JGB fell a further 1bp or so to 0.04%, while 10Y AGCBs fell about 7bps to 1.51%.

Flash PMIs and Tokyo CPI of most interest in Japan this week
As far as data are concerned, it was a quiet start to the week in Japan with no reports of any note today. The remainder of this week’s local diary is also sparsely populated. Tomorrow will bring news regarding nationwide department stores sales in May, while the BoJ will release its measures of underlying inflation for May. Probably most interest this week will centre on Wednesday’s flash PMIs for June, which declined only modestly last month despite ongoing restrictions on activity across around half of the country. On Thursday, base effects should result in a further lift in services PPI inflation in May. The week concludes with the release of the advance Tokyo CPI for June. Sadly, at least for the BoJ, this report will likely continue to indicate little flow-through from higher input prices to prices paid by consumers. (Our latest Japan chart book, published last week, can be found here).

China’s prime lending rates unchanged in June; sparse data flow over the remainder of this week
As widely expected, especially after the PBoC’s maintained its 1-year MLF rate at 2.95% last week and with Governor Yi Gang having earlier in the month judged that consumer price inflation is likely to remain below 2% this year (well below the government’s 3% target), China’s prime lending rates remained steady for a 14th consecutive month in June. The 1-year rate – the reference rate for corporate loans – was fixed at 3.85%. Meanwhile, the 5-year rate – the reference rate for mortgage loans – was fixed at 4.65%.

There are no market sensitive economic release due in China over the remainder of the week, with the diary featuring just final Q1 current account data on Friday and May industrial profits data on Sunday.

Flash euro area PMIs on Wednesday to point to accelerated momentum at the end of Q1
In the euro area, this week brings plenty of top-tier economic sentiment surveys for June, which should all show improved momentum thanks to the continued easing in lockdown measures, the moderation in the number of new coronavirus cases, and the accelerated vaccination programme. After tomorrow’s preliminary Commission consumer confidence index, Wednesday brings the flash PMIs, which are likely to point to an acceleration in the pace of economic expansion led by services, for which the euro area activity PMI is expected to rise about 2½ppts to 57.7, which would be the highest since January 2018. The euro area manufacturing output PMI is also likely to remain elevated but edge back down for a third successive month from 62.2 in May. The survey will also likely continue to report backlogs of work close to record highs and continued very strong input price pressures in the sector. Overall, the euro area composite PMI is expected to rise above 58.0 to the highest since January 2018, underscoring the likelihood of a firm return to positive GDP growth in Q2. Similarly, national business sentiment surveys from Germany, France (Thursday) and Italy (Friday) will also likely suggest that firms are upbeat about business conditions. Other data due this week include Spanish Q1 GDP numbers on Thursday, which are expected to confirm the contraction of 0.5%Q/Q (-4.3%Y/Y), and euro area bank lending data for May on Friday.

While today will be quiet data-wise, this afternoon ECB President Lagarde will speak at the European Parliament after the Governing Council on the weekend seemingly made progress on key issues related to its strategic policy review. Expect Lagarde’s language on the economic outlook and near-term monetary policy outlook, to be fully consistent with her messages following the Governing Council’s 10 June policy meeting, including the judgement that current price pressures are highly likely to be transitory.

BoE announcement on Thursday the focus in the UK – expect no change to policy or future guidance, albeit with risks of a more hawkish tone
The main event in the UK this week will be the BoE’s monetary policy announcement on Thursday. Since the BoE published forecasts following its previous MPC meeting on 22 April, economic activity appears to have been broadly in line if not stronger than it anticipated. And inflation appears to have picked up a little ahead of the BoE’s expectations, having risen above target to 2.1%Y/Y in May – at last month’s meeting, the BoE did not expect that threshold to be passed until much later in the year. At the coming meeting, however, the MPC will likely continue to judge recent price pressure to be transitory and expect inflation to return close to target over the medium term. But it will underscore again that the outlook for the economy, including the relative movements in demand and supply, remains highly uncertain, and there is the risk of a more hawkish tone. Nevertheless, we do not expect any change to current policy or guidance at the forthcoming meeting. Given his concerns about upside risks to inflation, Chief Economist Haldane – for which this will be his last meeting – will likely again be the sole member to vote for reducing the target stock of asset purchases from £875bn, which will be fulfilled by the end of the year. And the MPC will also repeat that it does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation.

Data-wise, as in the euro area, the UK focus in the coming week will be survey data for June, including the CBI’s industrial trends survey (tomorrow), the preliminary PMIs (Wednesday), and GfK consumer confidence and CBI distributive trades surveys (Friday). Like in the euro area, we expect these to be consistent with firm growth this month, despite the UK Government’s decision to extend the remaining restrictions on activity for a further four weeks. In particular, the composite PMI is expected to remain close to its record high of 62.0, thanks to robust conditions in both manufacturing and services. Indeed, the headline services index is expected to rise 1.1pts to a series high of 64.0 in June.

Fed commentary and May inflation data in focus in the US this week
Following last week’s apparent FOMC pivot, the focus in the US this week will likely centre on the Fed speaking diary and the further news on inflation in May that will come at the end of the week. The former includes testimony in the House by Fed Chair Powell, while a number of regional presidents have speeches on the economy scattered through the week. The Fed will also release the outcome of its latest round of bank stress tests on Thursday. Regarding inflation, Friday will bring the release of the personal income and consumer spending report for May. As regards the core PCE deflator, in light of the CPI data released earlier this month, Daiwa America Chief Economist Mike Moran expects a 0.5%M/M advance, lifting annual inflation to around 3.3%Y/Y from 3.1%Y/Y in April. Elsewhere in the report, despite further improvement in the labour market, Mike expects a 3.5%M/M dip in personal income as transfer payments continue to normalize. However, the continued reopening of the economy should provide a boost to spending of services, leading to a 0.5%M/M increase in overall consumer spending despite the softness seen in retail sales data earlier this month.

As far as the rest of this week’s diary is concerned, the first notable release this week is tomorrow’s existing home sales report for May. Given softness in pending home sales and mortgage applications, Mike expects sales to have declined a further 1.7%M/M following steeper declines over the preceding three months. On Wednesday, Mike expects new home sales will also post a small decline in May, while he expects that current account data will point to a markedly wider deficit in Q1. On Thursday, the ‘final’ release of GDP for Q1 might see the current estimate of 6.4%AR inch up due to upward revisions to retail spending. Greater interest should centre on the advance readings on durable goods orders and merchandise trade for May. Regarding the former, Mike expects a solid 2.5%M/M rebound in total bookings following the transport-driven dip in April (core capex orders will be of particular interest after an encouraging 2.2%M/M increase last month). However, he expects that exports may have struggled to hold on to all of the sharp gains recorded over the past two months, causing the trade deficit to widen by around $3.3bn to $89.9bn in May. On Friday, the University of Michigan’s finalized consumer survey for June will close out the week.

Australian retail sales inch forward in May; a speech by RBA’s Ellis of greatest interest this week
According to preliminary data provided by the ABS – based on responses from businesses accounting for around 80% of total turnover – Australia’s retail sales increased by just 0.1%M/M in May, albeit coming after a solid 1.1%M/M increase in April. This left the level of sales up 7.4%Y/Y while sales over the first two months of this quarter are tracking a solid 1.7% above the average seen through Q1. According to the ABS, food retailing increased a strong 1.5%M/M but this was largely offset by lower spending on household goods (-1.0%M/M) and apparel (-1.5%M/M). Spending grew a strong 1.5%M/M in the states of Queensland and Western Australia, but pandemic-driven restrictions led to a 1.5%M/M decline in spending in Victoria. It is worth noting that the ABS will discontinue the release of preliminary retail sales data following the release of next month’s report.

Looking ahead, on the data front the only reports of any note over the remainder of the week are the flash PMI reports for June and the preliminary merchandise trade report for May, both released on Wednesday. In our view, of greater interest will be a speech by RBA Assistant Governor Luci Ellis, also on Wednesday, especially after last week’s stupendous Labour Force report.

Consumer confidence and merchandise trade data ahead in NZ this week
There were no economic reports of note in New Zealand today and the remainder of the week is quiet too. Tomorrow will bring the release of Westpac’s quarterly measure of consumer confidence while merchandise trade figures for May will close the week out on Friday. Neither will have much influence on local markets, with investors now awaiting the release of Q2 CPI and labour market data in mid-July and early August respectively.


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