Asia began the trading week digesting the news of a softer-than-expected NFP read, faster-than-expected wages growth in the US, combined with deflation in Chinese consumer and producer prices.
Lower job additions came as a relief for Fed watchers on Friday, but the wages grew faster than expected, and the unemployment rate fell slightly to 3.6%. All in all, the US jobs data was still hot, and backed the Federal Reserve’s (Fed) campaign of policy tightening with further rate hikes. This being said, the US 2-year yield slipped below 5%, the 10-year yield consolidated above 4%, as the US dollar index was sold off aggressively below the 50 and 100-DMAs.
Due Wednesday, US inflation is expected to have fallen from 4% to around 3% in June, with a possibly uptick in the monthly data. But core inflation could prove stickier at around the 5% mark. In all cases, softening, and ideally softer-than-expected inflation figures carry the potential of pushing the Fed hawks back. That could give quick support to the US stocks which ended the first week of July, and the first week of H2, in the negative.
Earnings season
The earnings season kicks off this week with big US bank earnings. JP Morgan, Wells Fargo and Citigroup will be reporting earnings on Friday. Earnings of large banks may have reached their peak last quarter due to several factors. 1: Net interest income is likely to continue declining, 2. credit costs are gradually returning to normal and increasing, and 3. inflation is putting pressure on expenses. Then, banks are preparing for anticipated regulatory changes by increasing their liquidity levels, raising debt capital, and holding back on share repurchases. These actions are negatively affecting earnings per share growth for banks in general and could have a parallel negative impact on stock prices as well.
Also, we now observe steady deposit and loans, and a revenue increase in some US regional banks – which at the current price levels are considered as being undervalued. The major concern is the rising Fed rates that will continue putting pressure on the US banking system. And the regional banks remain the most in danger.
Chinese deflation
The Chinese inflation came in unexpectedly soft in June. Consumer prices fell 0.2% m-o-m, as the decline in producer prices accelerated more than expected to 5.4% y-o-y. The Chinese efforts to boost economy and inflation are not working. That’s maybe why the Chinese regulators chose to ease pressure on their tech giants. Last Friday, the regulators finally ended a yearlong inspection of Alibaba’s Ant Group and said that the tech industry will see ‘normalized supervision’. Alibaba shares jumped 8% in New York last Friday but would that be enough to bring investor confidence back is not sure yet.
The morose Chinese inflation limited appetite in oil this morning in Asia, but the price of a barrel of crude rallied past the $73pb to the 100-DMA last Friday, as the fresh round of production cuts from Ryad and Moscow slowly but surely brought the oil bulls back to the battlefield as long-term supply worries started weighing on mood in the bears’ camp. Trend and momentum indicators are now comfortably bullish, and hint that the rally could extend. The next natural target for the oil bulls is the 200-DMA, which stands near the $77pb level.
