Chinese stimulus looking likely

Further economic stimulus is looking likely in China, where the likelihood of further support for the property sector and for the economy more generally was flagged by state-run financial newspapers. There were already concerns around weakening Chinese growth which were compounded by the CPI inflation print on Monday which showed 0.0% y/y, and a factory gate inflation print which was sharply negative. Measures could include lowering deposits and cutting mortgage rates in order to help facilitate a soft landing for the sector, alongside support for developers.

There was little in the way of major market data releases yesterday, leaving markets focused on the upcoming US CPI inflation print which is due tomorrow. The consensus forecast is for a y/y rise of 3.1% on the headline, which would be the slowest pace of price growth since March 2021 if realised, while the core inflation rate is forecast at a somewhat higher 5.0%. Expectations for a return to hiking by the FOMC at its July meeting remain near a 90% probability even after the softer NFP print released at the close of last week.

Turkey’s headline unemployment rate dropped to 9.5% in May, down from 10.0% in April. This was on the back of a 193,000 fall in the number of jobless people to 3.33mn, while the youth unemployment rate fell to 17.0%, from 18.6% previously.

Egypt’s CPI inflation rate rose to 35.7% y/y in June, from 32.7% the previous month. Monthly price growth slowed from 2.7% in May to 2.1%. The annual print was the highest reading in at least 14 years, with food & beverage prices up 65.9%.

Today’s Economic Data and Events

• 10:00 UK ILO unemployment rate 3mths, May. Forecast: 3.8%
• 11:00 Turkey current account balance, May. Forecast: -USD 7.4bn
• 13:00 Germany ZEW survey expectations, July. Forecast: -10.6
• 13:00 Germany ZEW survey current situation, July. Forecast: -61.5

Fixed Income

• US Treasuries opened the week on a stronger footing even as several Fed officials talked up the need to extend rate hikes throughout the remainder of the year. Yields on the 2yr UST dropped around 9bps to 4.8576% while the 10yr yield settled at 3.9938%, down about 7bps. Fed vice chair Michael Barr said the Fed had “made a lot of progress…but we still have a bit of work to do” while San Francisco Fed president Mary Daly said a “couple more rate hikes” would be needed and Loretta Mester from the Cleveland Fed said the policy rate needed to move “somewhat further” to get inflation on target.
• European bond markets were moderately weaker at the start of the trading week with bund yields near unchanged while Italian and some peripheral bonds saw their yields move higher.
• Turkey 10yr locals rallied strongly overnight with yields down about 26bps to 15.91%. South African 10yrs weakened modestly with yields up about 3bps at 12.08%.

FX

• The US dollar started the week on a softer footing, dropping against most peers overnight. EURUSD added 0.3% to USD 1.1001, getting to the 1.10 handle for the first time since May. Final estimates for May CPI and the German ZEW index released today should give the next direction for the pair ahead of US CPI later in the week. GBPUSD rose by 0.2% to USD 1.2861 while USDJPY fell by 0.6% to 141.31, its lowest level since mid-June.
• Commodity currencies fared worse with USDCAD tilting slightly higher at 1.3280 while AUDUSD closed lower by 0.2% at 0.6675.

Equities

• Equity markets started the week positively after the losses at the close of last week. In Asia, the Hang Seng added 0.6% and the Shanghai Composite 0.2%, although in Japan the Nikkei lost 0.6%.
• Positivity continued in Europe where the composite STOXX 600 added 0.2%, with the DAX and the CAC both up 0.5%. In the US, both the S&P 500 and the NASDAQ closed 0.2% higher while the Dow Jones gained 0.6%.
• Locally, the DFM closed up 0.4% while the ADX ended the day 0.2% lower. In Saudi Arabia the Tadawul also lost 0.2%.

Commodities

• Oil prices dropped at the start of the week with Brent futures down 1% at USD 77.69/b and WTI off by 1.2% to USD 72.99/b. There were few fundamental catalysts to support a move in either direction. Spreads in the front month of the Brent curve fell to USD 0.29/b in backwardation for the 1-2 month contracts while the same spread in WTI is holding near neutral levels.