Author: Jamie McGeever
(Reuters) – A look at the day ahead in Asian markets.
China’s latest inflation data was released on Thursday, and it couldn’t come at a more fascinating — some might say alarming — time for global bond markets.
Long-term yields around the world are rising as investors bet that sticky inflation will force the U.S. Federal Reserve and other central banks to reduce or even halt their rate-cutting cycles.
The UK 30-year gilt yield is at its highest since 1998, the US 30-year bond yield is below 5% and the US ‘term premium’ – the risk premium investors demand for long-term lending to Uncle Sam rather than short-term returns debt – is the highest in a decade.
If this reflects investors’ fears that the inflation genie has not been put back in the bottle and that central banks are losing control of the long end of the bond curve, policymakers should be concerned.
Fed Governor Christopher Waller appeared relatively relaxed, however, saying on Wednesday that he still thinks inflation will fall toward the Fed’s 2% target, allowing for further rate cuts. But minutes from the Fed’s policy meeting last month showed policymakers are cautious, particularly about the impact of policies expected from the incoming Trump administration.
Money markets are pricing in just 40 basis points of Fed easing this year, and the year-over-year rise in oil prices is the biggest in six months. Investors’ fears of inflation are growing.
The global difference is China, where policymakers are battling deflation. As Jim Bianco of Bianco Research points out, it’s the only major bond market in the world where yields are falling.
Annual producer inflation has been negative every month since October 2022, indicating that price pressures across the economy remain deflationary. Annual consumer inflation is close to zero and has not been above 1% for almost two years.
Data on producer and consumer price inflation in China for December will be released on Thursday. According to consensus forecasts in Reuters polls, economists expect annual CPI inflation to edge slightly to -2.4% from -2.5% in November, while annual CPI inflation cooled to just 0.1% from 0 .2%.
This is the context in which Chinese bond yields are falling to their lowest levels ever. The 30-year yield is already below the 30-year yield on Japanese government bonds, and the 10-year yield is now less than 50 basis points away from falling below its 10-year equivalent.
HSBC analysts on Wednesday cut their year-end 10-year Chinese bond yield forecast to 1.2% from 1.8%.
The yuan remains under heavy selling pressure and fell to a 16-month low on Wednesday. It is now poised to break the September 2023 low of 7.35 per dollar, a move that will take it to levels last seen in 2007.
Here are the key developments that could provide more guidance to markets on Thursday:
– China PPI, CPI inflation (December)
– Retail sales in Australia (November)
– Trade of Taiwan, Australia and the Philippines (December)
