Marketmind: Inflation pressures are cooling, rapidly

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

Bond yields, interest rate expectations, oil prices and inflationary pressures around the world are falling, and the conviction behind this broad-based move appears to be strengthening.

That’s the backdrop to the Asian market open on Thursday, but it won’t necessarily boost investor sentiment or power a rally in risk assets like emerging market stocks.

The slide in yields, oil and rate expectations on Wednesday, in some cases to multi-month lows, is increasingly being driven by worries over the U.S. economic outlook.

Figures this week show that the U.S. labor market is softening, intensifying the spotlight on November’s non-farm payroll report to be released on Friday.

Although financial conditions are loosening, Wall Street’s big three indexes fell on Wednesday (the Russell 2000 held up better as investors continued to rotate into small caps). Asian and emerging stocks may struggle too on Thursday.

The Asia Pacific economic calendar on Thursday includes indicators that will shine a regional light on these issues and concerns, as well as FX reserves figures for five countries including China.

Thailand publishes its November inflation numbers. Analysts polled by Reuters expect CPI monthly inflation of -0.3% and the annual rate to slow slightly to 0.6%.

Thai CPI doesn’t often grab investors’ attention, but it will be watched more closely than usual to see whether it paints a similar picture to South Korean and Tokyo CPI this week.

Both these reports showed inflation cooling more than expected. Indeed, consumer prices in South Korea plunged 0.6% in November from the previous month, the fastest rate of deflation in three years.

The latest Chinese and Australia trade figures are on tap too. Alarmingly weak trade flows earlier this year were one of the biggest red flags that the Chinese economy was creaking, but the ship seems to have steadied in recent months.

The outlook for Chinese trade isn’t particularly bright though – U.S. growth next year will slow significantly, perhaps to around 1-1.5%, the euro zone is flirting with recession, and slowing growth in China to less than 5% will weigh on demand for imports.

Currency traders and central bank watchers, meanwhile, will take note of the latest FX reserves figures on Thursday from Asian countries – China, Indonesia, Malaysia and Singapore – and Hong Kong.

Their total holdings currently exceed $4 trillion, of which China accounts for $3.1 trillion.

International reserves managers are conservative by nature, so changes to their investments tend to come at a glacial pace. Still, the broad trend over the last year or so has been one of central banks reducing their holdings of U.S. Treasuries, potentially another headwind for the dollar.

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

– China trade (November)

– China FX reserves (November)

– Thailand CPI inflation (November)

(By Jamie McGeever)