Marketmind: China seen sliding into deflation

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

The first round of top-tier Chinese economic data this week was a blow for those hoping the world’s second-largest economy was emerging from its deep funk, so what will the second round on Wednesday bring?

Further disappointment, most probably.

Figures on Wednesday are expected to show that Chinese consumer prices fell 0.4% in July from the same month a year ago, meaning China will be the first G20 country to fall into deflation since Japan last posted negative CPI growth two years ago.

With cracks also reappearing in the Chinese property sector and Wall Street knocked off course by U.S. banking downgrades by ratings agency Moody’s, risk appetite in Asia is likely to be in short supply on Wednesday.

After Tuesday’s trade data showed that exports fell a larger-than-forecast 14.5% last month and imports plunged more than twice as fast as expected, the balance of risks for July’s CPI print is probably to the downside.

Nobody can say they haven’t been warned. Producer prices in China have been falling on an annual basis every month since October, and more importantly, the pace of decline has accelerated this year.

June’s 5.4% fall marked the deepest factory gate deflation since 2015. Figures on Wednesday are expected to show a slight cooling off to 4.1% in July, but again, would anyone be completely shocked if it came in below forecasts?

The range of PPI forecasts is -6.1% to -2.9%, and the CPI range is -0.9% to 0.5%, according to Reuters polls.

Staying with China, Country Garden said on Tuesday it has not paid two dollar bond coupons due on Aug. 6 totaling $22.5 million, confirming market fears that the biggest privately-owned developer in China is slipping into repayment troubles.

Hong Kong’s benchmark property index lost nearly 5% on Tuesday, and with sentiment already badly soured by the trade figures, China’s blue chip CSI 300 index fell for a second day and the yuan fell to a four-week low against the dollar.

On the Asian corporate calendar, Bridgestone, Honda and Sony are among the major Japanese firms publishing their latest earnings reports on Wednesday.

Asian stocks will likely open on the defensive after the downgrading of several U.S. lenders by Moody’s reignited fears about the health of U.S. banks and the economy.

Moody’s cut ratings on 10 small- to mid-sized lenders by one notch and placed six banking giants on review for potential downgrades. After coming within 5% of their lifetime highs last month, the S&P 500 and Nasdaq have both fallen five sessions out of six so far this month.

Here are key developments that could provide more direction to markets on Wednesday:

– China CPI and PPI inflation (July)

– South Korea unemployment (July)

– Japan broad money supply (July)

(By Jamie McGeever; editing by Deepa Babington)