Ahead Today
G3: Fed’s Williams speaks, Canada Retail Sales
Asia: Malaysia 2Q GDP, Philippines Balance of Payments
Market Highlights
China concluded its Third Plenum meeting for long-term economic plans, and the communique possibly signaled more stimulus to support the economy, while committing to a focus on long-term transformation plans such as on innovation, “new-quality productive forces” and “high-quality growth”. The top leaders pledged to “unswervingly” achieve the full-year growth target, implement macro policies and actively expand domestic demand, a phrase which seemed a departure from past Plenums and could signal that officials are worried about growth prospects in the near-term. Meanwhile, there were also references to containing risks in the property sector, local government debt and strengthening the resilience of supply chains. We will get more details including possible policy support in the full report out in a few days, together with specific policies from the end-July Politburo meeting (see also ChinaPulse – Weak 2Q growth shows need for government to step up policy support).
Overall, markets overnight took on more of a risk-off tone, with equities falling, yields declining, and the Dollar strengthening. The US labour market showed some modest signs of softening, with initial jobless claims rising more than expected to 243k , while continuing claims picked up further to 1867k. Markets have continued to ramp up bets for a September rate cut both for the Fed and the ECB, and yesterday’s ECB meeting left that door open even as the central bank did not pre-commit to a particular rate path.
Regional FX
Regional FX
Asian FX markets were weaker on the back of the stronger dollar, with KRW (-0.2%) and THB (-0.5%) underperforming. Bloomberg news reported that India will likely reduce its fiscal deficit target slightly to 5% of GDP or lower in its upcoming Budget FY2024/25 to be announced on 23 July. Meanwhile, RBI just published an updated study saying that the country’s neutral rate has risen to 1.4-1.9%, up from 0.8-1% in FY2021/22, the last time the estimates were updated. With the repo rate at 6.50% and latest inflation prints at around 5%, this could mean that there is little space in the near-term to ease policy, at least until inflation moves closer towards 4.5%. Overall, these developments are in line with our latest views on India, where we expect the government to continue to commit to fiscal prudence while spending some but not all of the extra fiscal space, and for a shallow rate cut cycle by the RBI (see IndiaPulse: Towards more inclusive growth). There has been some upward pressure on USDINR in recent weeks, but we think this should fade over the course of the quarter with continued strong capital inflow inflows helping to fund a wider but still manageable current account deficit.
