MORGENBOD ASIA – Deflation in China, inflation in US – both weighing on sentiment

A look at the day ahead in Asian markets from financial market columnist Jamie McGeever.

Lingering concerns about deflation in China and caution ahead of US inflation data will keep markets under control on Thursday, as investors look to India’s interest rate decision, Japan’s headline inflation and Philippine GDP data.

Renewed tensions between the U.S. and China could be back on investors’ radars as the White House announces plans to ban some U.S. investments in Chinese technology and demand government notification of other investments.

While Chinese shares fell for a third day on Wednesday, the rest of Asia weighed on China’s deflation numbers and MSCI Asia’s ex-Japan index rose 0.5% for its best performance so far this month.

There may have been some relief that the -0.3% annualized inflation of -0.4% was not as bad as economists had expected — at least enough to push China’s economic surprise index to its highest level since June 26.

Similarly, more favorable US inflation than consensus estimates on Thursday could ease some of the gloom in markets since Fitch stripped the US of its triple-A credit rating on August 1.

Wall Street could use some relief as the S&P 500 fell for the sixth time in seven sessions on Wednesday ahead of the July inflation report.

However, keep an eye on oil prices. Crude oil futures are at their highest level since January and are now down just 9% from a year ago – a significantly weaker deflationary push than the 40% year-on-year decline recorded in June.

In terms of inflation, Japan’s annual headline inflation is expected to ease to 3.5% in July from 4.1% in June. This would be the slowest decline since March 2021 and the seventh straight decline from December’s peak of 10.2%.

The Reserve Bank of India is expected to keep its repo rate at 6.50% on Thursday, but in light of the recent rise in food prices, it is stronger and more durable than expected.

Interest rate markets are taking into account a good chance of a quarter point increase by the end of the year, if not this week. Currency traders do not appear to be expecting a hike – the rupee enters the meeting after crossing October’s record low of around 83 to the dollar.

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

– India interest rate decision

– Japan headline inflation (July)

– Philippines GDP (Q2)