PBoC Stands Ready to React

It was not unusual to see Chinese Government Bonds end the week on a high note, especially after a weaker than expected trade and loan data for July fueled investor expectations that the PBoC could announce a cut in the bank’s reserve requirement (+20%) ratio as early as this weekend. Softer global data has seen investors increase their demand for safe haven government debt. China is the second largest global economy and trade data, coupled with weaker export numbers, would suggest that economic activity in H2 would remain on the somewhat sluggish side. Along with new yuan loans trailing estimates, suggests that the global economy is also walking the weakening plank and raises the odds that the Chinese government will step up measures to support expansion sooner rather than later.

Below are some other highlights of the week:

ASIA

• TWD: Taiwan’s CPI rose +2.46%, y/y in July, compared with a +1.77% the previous month. It’s not a surprise that food prices, caused by the rainy weather conditions in June, are the main culprit behind higher prices in general.
• AUD: Analysts noted that Aussie Melbourne Institute monthly inflation gauge rose +0.2%, m/m in July, after a -0.2% drop in June.
• IND: Indonesia’s GDP rose +6.4% in Q2, following a +6.3% rise in Q1, surprising consensus expectations of a modest fall in growth.
• AUD: The RBA left the cash rate unchanged (+3.5%), in line with consensus. The statement contained little “new” news, with the current monetary stance seen as appropriate. In regards to the AUD, the RBA repeated its comment that its currency remained high despite the fall in the terms of trade and weaker global outlook.
• NZD: Kiwi’s average hourly earnings advanced +0.2%, q/q in Q2, compared with +1.3% in Q1. Prime Minister Key warned that the RBNZ has scope to ease policy thanks to currency strength.
• TWD: Taiwan’s July exports fell -11.6%,y/y, much worse than the -7% fall expected. Along with Korea they both have shown monthly contractions and this may suggest that it does not bode well for exports in the rest of the region.
• JPY: Japan’s current account remained in surplus for the fifth consecutive month at Â¥433.3bn in June, down -19.6%, y/y, compared with a drop of -62.6% in May.
• PHP: The Philippines’ CPI rose +3.2%, y/y in July, up from +2.8% in June.
• MYR: Malaysian exports rose +5.4%, y/y in June, better than consensus at +3.1%.
• AUD: The Aussie economy added +14k jobs last month, slightly above consensus. The unemployment rate remained steady at +5.23% compared to a revised +5.25% in the previous month, and far, far away from levels that would worry policy makers at the RBA. The shoe that fell was the mix of full and part-time gains. The headline was disappointing with only a +9k rise in full time following a-35k decline in the previous month. This benchmark data should keep the RBA in the corner for Q3 and the only time they should appear is when this one directional, world loving currency of their starts to become a problem.
• CNY: China growth data disappointed this week, while inflation softened creating more room for the PBoC to cut interest rates. Chinese IP growth at +9.2%, y/y, moderated substantially from +9.5% in June and well below consensus (+9.7%). However, there are still estimates that Chinese GDP will top +8% this year. Any further easing will only serve up another boost. With headline inflation softening to +1.8%, y/y from +2.2% in June coupled with the fact that domestic food prices are beginning to moderate along with demand slowing will create even more room for the PBoC to cut interest rates.
• JPY: the BoJ board voted unanimously to keep the target for the overnight call rate and total QE unchanged. However, policy makers have not surprisingly downgraded its assessment of the economic environment. In particular, the BoJ noted that the “pickup in exports has moderated, and the recent reading on production has been relatively weak.” The latest METI industrial production data showed a -2.2%, q/q decline in Q2, the first quarterly decline in four quarters.
• KRW: BoK kept rates on hold, in line with consensus. The statement reiterated the committee’s expectations that the domestic economy will sustain a negative output gap for a considerable time going forward and inflation will remain low.
• AUD: Australia’s quarterly Statement of Monetary policy was more dovish than expected. The RBA revised its near-term GDP forecasts higher, but lowered its outlook for the medium term. The bank now expects the Aussie economy to track slightly below trend in 2013/14, with GDP growth averaging around +3% compared to the higher +3-4% forecast band previously.
• JPY: Japan’s IP production grew +0.4%, m/m, in June after contracting +0.1% in May, but capacity utilization fell for a third consecutive month.
• CNY: China’s trade surplus narrowed sharply to +$25.1b last month, compared with a market forecast of +$35.2b, exports increased just +1%, m/m vs. an +8% a year ago. Along with new yuan loans trailing estimates, suggests that the global economy is weakening and raises the odds that the Chinese government will step up measures to support expansion. An RRR cut this weekend?

AMERICAS Week in FX

EUROPE Week in FX

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