Marketmind: China deflation, U.S. inflation – both dent sentiment

By Jamie McGeever

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

Lingering concern over China’s slide into deflation and caution ahead of U.S. inflation data will keep markets in check on Thursday, as investors also eye India’s interest rate decision, wholesale inflation from Japan and Philippine GDP data.

Renewed tension between the United States and China could be back on investors’ radar, with the White House detailing plans to prohibit some U.S. investments in Chinese technology, and requiring that the government be notified of other investments.

Although Chinese stocks fell for a third day on Wednesday the rest of Asia shrugged off the Chinese deflation figures, and the MSCI Asia ex-Japan index rose 0.5% for its best performance so far this month.

Perhaps there was some relief that the -0.3% annual rate of deflation was not quite as bad as the -0.4% economists had expected – it was certainly enough to lift China’s economic surprises index to its highest since June 26.

In the same vein, a more benign reading of U.S. inflation on Thursday than consensus estimates could lift some of the gloom that has descended on markets since Fitch stripped the United States of its triple-A credit rating on Aug. 1.

Wall Street could do with some relief as the S&P 500 fell on Wednesday for the sixth session out of seven, ahead of the July inflation report which is expected to show the annual rate of consumer price rises increasing to 3.3% from 3.0%.

Keep an eye on oil prices though. Crude futures are the highest since January and are now down only 9% from a year ago – that’s a significantly weaker deflationary impulse than the 40% year-on-year decline registered as recently as June.

Also on the inflation front, the annual rate of Japanese wholesale price inflation is expected to have fallen to 3.5% in July from 4.1% in June. That would be the lowest since March 2021 and the seventh straight decline from the peak of 10.2% in December.

The Reserve Bank of India, meanwhile, is expected to keep its repo rate steady at 6.50% on Thursday but adopt a far more hawkish tone in the face of a recent rise in food prices which has been sharper than expected and seen lasting longer.

Interest rate markets are pricing in a decent chance of a quarter-point hike, if not this week then certainly by the end of the year. Currency traders don’t seem to be expecting a hike – the rupee goes into the meeting bumping along October’s record low around 83 per dollar.

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

– India interest rate decision

– Japan wholesale price inflation (July)

– Philippines GDP (Q2)

(By Jamie McGeever)