Marketmind: China CPI spy

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

Chinese inflation on Friday grabs the data spotlight in Asia at the end of a week in which hawkish Fed commentary has taken some froth of risk assets, as investors also ponder the market implications of deepening Sino-U.S. political tensions.

Consumer price inflation in January is expected to have risen 0.7% on the month and at an annual rate of 2.2%, up from 0.0% and 1.8%, respectively, as the economy picks up following its COVID-19 pandemic paralysis.

On its own, economic re-opening will likely accelerate growth and inflation this year. Economists at UBS expect growth of around 5% to be fueled by consumption growth of 7%, while analysts at Goldman Sachs predict a “faster-than-expected reopening process” will drive 2023 real GDP growth of 5.5%.

But immense structural challenges – such as the over-leveraged and debt-saddled property sector – are now being compounded by rising geopolitical risk thanks to the spy balloon crisis.

A senior State Department official said on Thursday that the United States will explore taking action against entities connected to the Chinese military that supported the flight of the Chinese spy balloon into U.S. airspace last week.

JP Morgan CEO Jamie Dimon told Reuters on Wednesday that he intends to visit China, and that dialogue and communication on all issues between the two superpowers is critical. “No talking will lead to a bad outcome.”

But others may not see it that way. Deteriorating Sino-U.S. relations could encourage some investors and businesses to rethink their exposure to China, potentially affecting Chinese assets and rippling through to others, like European equities and U.S. Treasuries.

Right now, Chinese stocks, the Hang Seng tech index and the MSCI Asia ex-Japan index are poised to close in the red for a second straight week. The S&P 500 and MSCI World index are on track for their biggest weekly decline in nearly two months.

Despite individual economic and stock-specific developments – like the big undershoot in German inflation, or Disney’s share price surge on Thursday – the bigger picture is one of ‘higher for longer’ rates. See Australia, India and Sweden this week.

And of course, the Fed. Wall Street is now pricing in a terminal rate this year comfortably above 5%, with barely 10 basis points of easing by year-end. Risk assets are repricing accordingly.

Here are three key developments that could provide more direction to markets on Friday:

– China CPI and PPI inflation (January)

– Japan goods price inflation (January)

– India industrial production (December)

(By Jamie McGeever; Editing by Josie Kao)