China concerns persist, as UK core inflation lifts GBP

Markets appear to be in a more upbeat mood today, with slight gains in Europe expected to translate into a positive open in the US. Fears in China do remain prevalent as exhibited via the sea of red in Asia, with credit concerns arising after wealth manager Zhongrong missed payments on dozens of products. Losses in the Chinese markets have since led to the government advice that investment funds should ‘avoid’ selling Chinese stocks to alleviate recent equity weakness. With weekly API crude inventories posting a greater than expected decline (-6.2m), energy markets appear to be struggling for direction as it is driven by supply dynamics and Chinese economic concerns.

The overnight RBNZ rate decision provided a surprise boost for the NZD, with a decision to retain rates at 5.5% coming alongside comments that highlighted a general satisfaction with policy where it is. Comments from Governor Orr signalled confidence that the country is in for a soft landing, with declining inflation expected to hold any further rate hikes at bay for now.

UK inflation data has dominated the European session, with a sharp decline in the headline CPI figure (6.8%) driving further divergence from the static core metric. While a 1.1% decline in headline inflation does help further Rishi Sunak’s pledge to halve inflation this year, the stubbornly high core reading essentially highlights the fact that this is largely driven by external factors such as food and energy prices. With supply-side factors driving the current disinflation, the Bank of England needs to face up to the potential that their rate hikes are thus far failing to significantly impact the demand side of the equation.

A surprisingly strong US retail sales reading gave cause for concern yesterday, with markets recognizing that strong data points like this represent the basis for another rate hike at the Fed. Nonetheless, sentiment at the FOMC will be put to the test later on, with their latest minutes expected to signal a potential end to the rate hike phase despite ongoing hawkish sentiment. The strong consumer story carried through into the earnings picture, with Home Depot managing to beat on earnings and revenues yesterday. Target will hope to carry on that theme when they report today, with Cisco also stepping up.