Beijing Covid outbreak weighs on Chinese markets

Chris Scicluna
Emily Nicol

Beijing Covid outbreak weighs on Chinese markets, but risk appetite firmer elsewhere
A mixed start to the week for Asian financial markets. Chinese stocks were initially in reverse after Beijing reported a new high in Covid-19 cases for the current wave (up more than 50% on the day to 99). After paring earlier losses, the CSI300 is still down roughly 0.6% with the Hang Seng a little more than 1% lower and its tech index down about twice as much. And elsewhere, the mood is brighter. On a quiet start to the week for economic news from Japan, the TOPIX closed up 0.9% with US stock futures up more than 1% and European equity markets set to open higher too. And in bond markets, UST yields are some 4-5bps higher across the curve, so 2Y yields are only a few bps higher than where they were this last week. But following the wobble in risk appetite late last week, 10Y UST yields are still down roughly 10bps on the same basis. Euro govvie yields are slightly higher too after ECB President Lagarde in a weekend interview again validated market expectations of rate lift-off in July, but also downplayed the likelihood of hikes of 50bps increments.

Japanese flash PMIs and Tokyo CPI figures for May the highlights this week
After a quiet start to the week, tomorrow brings Japan’s flash PMIs for May. Like the recent Reuters Tankan survey, these are likely to report a further pickup in the services sector recovery as the economy continues to normalise after the lifting of restrictions. But manufacturers are likely to suggest that they continue to struggle amid intensified supply bottlenecks and higher cost burdens. After Friday’s inflation data release saw the headline CPI rate jump to 2.5%Y/Y in April, the highest reading since October 2014, tomorrow also brings the BoJ’s estimates of underlying inflation for that month, including the trimmed mean CPI. Friday will follow with the Tokyo CPI figures for May, which are expected to report only a very modest uptick in the headline and core measures.

Euro area sentiment surveys to flag persisting supply-side constraints
May sentiment surveys will dominate the euro area dataflow this week, with most notably the preliminary PMIs coming tomorrow. The headline services activity PMI might well point to an accelerated pace of recovery this month as the sector continues to normalise after the latest pandemic wave and international travel picks up further. In contrast, the manufacturing output index is likely to imply still challenging conditions amid persisting supply constraints and elevated costs. Overall, the composite PMI is forecast to fall 0.8pt to 55.0, still nevertheless consistent with ongoing expansion. Ahead of this, the German ifo business survey will be published today. Elsewhere, the ECB will publish its latest bi-annual Financial Stability Review on Wednesday, while ECB President Lagarde is due to speak at Davos that day.

UK flash PMIs and retail sector survey to highlight impact of cost of living crisis
Like in the euro area, tomorrow brings the flash UK manufacturing and services PMIs for May, which are expected to suggest some loss of recovery momentum – albeit continuing to point to expansion in activity – as the cost of living crisis and heightened global economic uncertainty took their toll. Overall, the composite PMI is forecast to have declined almost 2pts to 56.5. Similarly, following the surprise pickup in retail sales in April, the latest CBI distributive trades survey (also tomorrow) is likely to point to weakening activity on the high street this month given the increasing squeeze on household budgets from high inflation. In terms of BoE-speak, today sees Governor Bailey appear on a panel at a conference at Austria’s National Bank discussing the return of inflation.

US FOMC minutes and monthly spending numbers among the highlights this week
In a relatively busy week for US releases, the minutes from the 4 May FOMC meeting are among the most noteworthy. This meeting saw the Fed raise the FFR target range by 50bps to 0.75-1.00%, signal further increases of 50bps at the coming two meetings and provide details of its QT plans. Wednesday will also bring the advance durable goods orders data for April, followed on Friday by the preliminary goods trade data and the monthly spending and income numbers for April. These are likely to report moderate growth in wages that month, with higher interest rates set to boost interest income too. Against this backdrop, our colleagues in Daiwa America expect spending to have risen again, albeit the figures will be distorted by higher prices. Indeed, the core PCE deflator is forecast to have eased only slightly from 5.2%Y/Y in March to 4.9%Y/Y in April. 

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