Tale of diverging CPI’s: China versus Norway
China reported its CPI and PPI for June overnight, with the former coming in at a stunning 0.0% YoY vs. +0.2% expected and core CPI hardly above zero either at 0.4% YoY. PPI was out at -5.4% YoY vs. -5.0% expected and -4.6% in May. China’s suddenly deflationary dynamics are getting considerable attention, with Richard Koo, who minted the “balance sheet recession” term and has been the expert on Japan’s experience for years, now seeing a surge in popularity as his framework is now seen highly applicable to China. The latest Odd Lots podcast features Koo as a guest. The soft Chinese inflation data has the AUD limping at the lower end of the range versus the US dollar again.
Norway, on the other hand, is seeing an entirely different inflationary dynamic, as its core “underlying” inflation metric surged another 0.9% MoM in June and 7.0% YoY, a new cycle high. This and the surge in crude oil prices on Friday have seen NOK making a show of strength as front-end Norwegian yields jump. Watching the sub-11.50 pivot lows from last month for more upside potential for NOK.
Macro week ahead: UK employment/earnings, US CPI, RBNZ, BoC
Plenty to focus on this week on the macro calendar, with the US CPI data the focus of the week on Wednesday. A couple of highlights:
TUE: UK Jun. Payrolls/Claims and May Earnings/Employment data.
The market could prove twitchy on these UK employment and earnings data on significant surprises. There was an enormous surge in claims and drop in payrolls two months back that was entirely revised out in the case of payrolls and revised significantly lower in the case of claims. Earnings registered a 7.2% YoY increase, nearly matching the cycle high from back in 2021.
WED: RBNZ, US June CPI and Bank of Canada
Little drama expected from the RBNZ this week as Orr and company were early and quick to tighten and the market figures they are happy with the current level until possibly October or November, depending on where inflation is headed – and the quarterly Q2 inflation data is up next week, carrying more weight, likely, than anything that the RBNZ has to say.
The US June CPI is the data, with the headline number expected to drop all the way to 3.1% YoY from 4.0% in May due to basing effects, as the worst of the spike in gasoline prices hit in June of last year. The core inflation is expected at +0.3% MoM and +5.0% YoY vs. 5.3% YoY in May and a peak rate last September of 6.6%. The PCE data series has shown somewhat stickier core inflation than this BLS’ CPI data series.
The Bank of Canada is priced significantly better than 50/50 to hike another 25 basis points, which would take the rate to 5.00%. It makes sense for the Bank of Canada to hike again – why restart the hiking cycle in June only to pause once again? The guidance will be more important than the decision on whether to hike. USDCAD reversed sharply on Friday after the US jobs data (with ripping Canadian jobs data on Friday providing most of the impetus, together with resurgent oil prices).
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY down-trend has lost considerable strength, but it will take more doing to reverse. The US dollar in focus now after Friday’s sell-off, with Wednesday’s CPI the next test there. NOK is strong on today’s CPI release and the oil rebound Friday.