15 August 2023
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PBOC cuts rates to support economy

By Edward Bell

The People’s Bank of China cut its medium-term lending facility, a primary policy rate, by 15bps to 2.5%. The cut to policy rates comes as China’s economy underperforms with particularly soft data coming out of the property market. The cut to the MLF was a surprise to market expectations and was a larger move than the last cut to policy rates of 10bps in June. Data for July affirmed the slowdown in China’s economy with industrial production at 3.7% decelerating from a month earlier and falling short of market expectations while retail sales also substantially underperformed, rising by just 2.5% compared with market expectations of 4%. Fixed asset investment is now up 3.4% year-to-date, slower than the 3.8% recorded a month earlier.

Japan’s economy performed much better than expected in Q2, rising by 6% q/q on an annualized basis. That was more than twice as fast as market expectations and a steep acceleration from performance in Q1. Net exports were the primary contributor to the improvement in GDP as private consumption dropped by 0.5% and business investment was flat q/q.

Inflation in India rose to 7.4% y/y in July, far ahead of market expectations of 6.5% and up from 4.9% recorded a month earlier. Food costs contributed to the surge in prices with the food index up 11.5% in July while core inflation slowed to 4.9% y/y. Improvements in weather conditions in recent weeks may help to improve the availability of food supplies in India and bring food costs lower in the months ahead. Elsewhere, India’s trade deficit stayed wide in July at USD 20.7bn, slightly smaller than the USD 20.9bn recorded for June. Exports dropped about 16% y/y in July while imports fell 17%.

Today’s Economic Data and Events

  • 10:00 UK Unemployment rate June: forecast 7.4%
  • 13:00 GE ZEW survey expectations August: forecast -14.9
  • 16:00 US Retail sales July m/m: forecast 0.4%

Fixed Income

  • US Treasuries weakened overnight despite no material catalyst—data or policywise—to support the move. Yields on the 2yr UST added 7bps to 4.9669% while the 10yr yield added about 4bps to 4.1913%. Minutes from the July FOMC will be out later this week and will provide the next major catalyst for where the market expects the Fed to go from here.
  • European bonds broadly were weaker overnight with gilt yields up 4bps to 4.56% and bund yields adding 1bps to 2.633%.
  • Fitch affirmed their ‘A+’ rating on Israel with a stable outlook. The rating agency expects inflation to slow with growth steady at around 3% this year and next.


  • Currency markets started the week with some dollar strength even as there was no material shift in data. EURUSD fell 0.4% overnight to 1.0906 while GBPUSD settled at 1.2683, down 0.1%. USDJPY extended its run higher for a sixth consecutive day, up 0.4% at 145.56.
  • Commodity currencies were also uniformly weaker. USDCAD moved higher at the expense of the loonie, up 0.2% to 1.3461 while AUDUSD fell 0.1% to 0.6487 and NZDUSD fell the same amount to 0.5976.


  • Global equity markets had a mixed open to the week but generally tilted stronger. The S&P 500 added 0.6% overnight with the Dow Jones was closer to flat. The NASDAQ was up a strong 1.1%. In European markets, the EuroStoxx 50 index added 0.2% while the FTSE dipped back by about the same amount.
  • Asian markets are trading mixed today with the Nikkei up 0.9%, bolstered by the stronger than expected Japan GDP numbers, while Chinese equities are softer as the cuts from the PBOC reinforce a view of a soft economy.


  • Oil prices closed lower overnight with Brent futures down 0.7% to USD 86.21/b and WTI off by 0.8% to USD 82.51/b. China’s apparent oil demand, calculated from net product imports and refinery runs, was up 21% y/y in July to 14.7m b/d. That is down from a peak of more than 15m b/d in April earlier this year but still represents particularly strong oil demand in an economy that looks to be lingering.

Written By

Edward Bell Head of Market Economics

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