Marketmind: After US, inflation focus turns to China

By Jamie McGeever

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

As investors digest the market and policy implications of this week’s U.S. inflation figures, Asia’s focus on Friday turns to Chinese producer and consumer price inflation, and to what extent they indicate a cooling of wider deflationary pressures.

Going by Wall Street’s decline on Thursday, sparked by a spike in long-dated U.S. bond yields following a weak 30-year auction, the mood will be one of caution, at best.

China’s PPI and CPI top a packed Asian economic calendar that also includes Chinese trade data, third quarter GDP and an interest rate decision from Singapore, unemployment from South Korea, and wholesale inflation from India.

China’s economy has been hit on several fronts this year. The currency hit a 16-year low, investors have dumped the country’s stocks and bonds, the property sector is imploding and disinflation is threatening to morph into outright deflation.

Annual producer price inflation has been negative for a year, although consumer inflation only briefly dipped below zero in July. September’s PPI and CPI readings on Friday will be closely watched for signs that the economy is reflating.

Economists polled by Reuters expect an annual PPI rate of -2.4% compared with -3.0% in August, and annual CPI to tick up to 0.2% from 0.1%. Slow progress.

The bigger picture for markets, however, continues to be dominated by U.S. yields and the Fed policy outlook.

Wall Street slumped on Thursday after the 30-year Treasury bond sale. The high yield investors demanded was around 4 basis points higher than the prevailing market rate at the time, the biggest ‘tail’ in nearly two years.

The ebb and flow of investor sentiment this week, centered around moves in Treasury yields and the U.S. yield curve, is instructive.

Essentially, it hasn’t really mattered if the curve has steepened or flattened – what has mattered is whether the moves have been led by bond buying or bond selling, either at the short or long end.

On Thursday the yield curve flattened the most in a single day since March, a ‘bull’ flattening led by heavy buying of long-dated bonds. Stocks rose. On Friday the curve ‘bear steepened,’ led by heavy selling at the long end. Stocks fell.

So markets end the week at the mercy of this push and pull over the U.S. rate outlook: strong signals from Fed officials and Fed minutes that rate hikes are probably over, against economic data that is still refusing to play ball.

One clear winner, though, is the dollar. It jumped 0.7% on Thursday – its best day since July – pushing the yen back down toward the key 150.00 per dollar area. Japanese intervention speculation is bound to swirl on Friday if that level breaks.

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

– China PPI and CPI inflation (September)

– China trade (September)

– Singapore policy decision and GDP (Q3)

(By Jamie McGeever; Editing by Josie Kao)