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Today’s Chinese CPI essentially guaranteed further cuts to the interest rate and the reserve requirement ratio (RRR) before the year is out. CPI came in noticeably below expectations for a 1.8% year-on-year increase, dropping to 1.6% in September from 2% in August. The positive emerging price pressures seen in the August data are increasingly looking like a one-off. Food and consumer goods prices eased noticeably from August, which is a negative for Chinese consumption – one of the bright spots in China’s slowing economy. This slowdown was further emphasised in the Core CPI number (ex-food and energy) which slowed to its weakest reading since May.
Concerns have increased about China’s ability to turn up growth in the fourth quarter in order to achieve its 7% GDP target. Further rate cuts this year seem inevitable, which does question how firmly the Chinese government will hold to its exchange rate peg. The USD/CNY rate has strengthened noticeably over the past two weeks, despite coming off 0.28% today. But further rate cuts are going to put renewed pressure on China to devalue its currency back to at least the CNY 6.5-6.6 level by year-end. The jump in yesterday’s export numbers proves the benefits of even that relatively minor devaluation.
The Shanghai Composite (SHCOMP) and the Hang Seng Index (HSI) initially rallied on the data, on the prospects of further monetary policy easing. But China has already eased monetary policy significantly and stepped up its fiscal spending, any rally based on a further increase seems inevitably short-lived.
Japan was also privy to a bad set of inflation data as well. Japanese PPI declined 3.9%, its lowest reading since 2009 and its sixth consecutive month of decline. Undoubtedly, the significant decline in commodity prices in recent times have contributed to PPI deflation. But this will be taken as another piece of evidence arguing for an extension of the Bank of Japan’s (BoJ) Quantitative and Qualitative Easing (QQE) program. The yen budged very little in the tightly traded band of 119.5 to 120.5 as global risk-off sentiment continued to see strong safe-haven yen buying.
The Nikkei, however, did not take the news well, immediately dropping 1.4% from the open and breaking through the key technical level of 18000. Energy stocks were the worst performers off the back of the further declines in oil overnight.
The ASX sold off sharply at the open, quickly dropping to 5163 within the first two hours of trading. The poor performance by commodities and US markets overnight and nervousness about the Chinese inflation release prompted the heavy initial selling. Although the market did seem to turn this around in afternoon trade as the prospects of further Chinese monetary easing boosted most Asia-Pacific equity markets.
With renewed weakness seen in commodities and oil overnight, the materials and energy sector continued to see heavy selling today. The energy sector was down 3%, with Santos and Origin hit particularly hard, declining 6.3% and 7.4%, respectively. While the materials sector fell 0.6%, with a worse decline halted by strong performances from gold-miner Northern Star Resources (+4.2%) and White Haven Coal (+4.8%).
The big news on the ASX today was Westpac’s (WBC) $3.5 billion cash raising and 20 basis point increase to investor and owner occupier home loans. Westpac was in a trading halt today, but the other three big banks flip-flopped between positive and negative territory today. If the other banks follow Westpac’s lead in increasing their home loan rates, then the Reserve Bank of Australia (RBA) will have considerable leeway for cutting rates in the next six months. The RBA has made clear its concerns about a growing bubble in certain parts of the Australian housing market. The Big Four banks have been steadily increasing the costs of housing loans as they pass on the necessary increase in capital holdings from 16% to 25% in line with the Australian Prudential Regulation Authority’s (APRA) regulations. This means the concerns over housing market related financial instability from lower interest rates have been lowered, meaning that Australia’s steadily slowing economy could be boosted by another 25-50 basis points of rate cuts in the next six months.
Banking stocks rose 0.2%, with Macquarie being the biggest drag on the sector falling 0.7%.