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Asia-Pacific Markets Slide on Japan's Inflation Data, TSMC's Net Income Decline; European Markets Await Spanish Election

Asia-Pacific markets experienced a decline on Friday as investors analyzed Japan's consumer price index figures for June. According to official data, the country's core inflation rate, excluding fresh food costs, was reported at 3.3%, aligning with economists' expectations polled by Reuters. This figure is slightly higher than May's rate of 3.2% and surpasses the Bank of Japan's 2% target. Additionally, Japan's headline inflation rate for June also stood at 3.3%, up from the previous month's 3.2%.
On the same day, Taiwan Semiconductor Manufacturing Company, the world's largest chipmaker, faced a 3.11% drop in morning trade after reporting its first quarterly net income decline in four years. In the second quarter, the company's revenue decreased by 10% compared to the same period last year, amounting to NT$480.84 billion, while net income fell by 23.3% year-on-year to NT$181.8 billion.
As European markets prepared to open on Friday, investor enthusiasm was tempered due to the upcoming Spanish election and anticipation for a significant week of corporate earnings. The U.K. Prime Minister Rishi Sunak's Conservative Party faced setbacks in a series of by-elections, losing two seats in parliament to the main opposition Labour Party and centrist Liberal Democrats. These results signal potential challenges for Sunak's party in the forthcoming general election in 2024.
Spain was also gearing up for a pivotal snap general election on Sunday that could potentially lead to a shift in power from left-wing Prime Minister Pedro Sanchez's four-year tenure to a more right-leaning government in Europe's sixth-largest economy.
In other news, U.K. retail sales experienced a boost of 0.7% month on month in June, attributed to unusually warm weather, as reported by the Office for National Statistics on Friday. Economists polled by Reuters had projected a more modest monthly rise of 0.2%.
Meanwhile, the Bloomberg Commodity Index was on track to record its third consecutive weekly gain, mainly driven by surging wheat prices following escalated tensions between Russia and Ukraine in the Black Sea region.​
 
Chinese Property Stocks Tumble on Debt Fears, Japan's Business Activity Holds Steady, Australia's Private Sector Contracts
On Monday, Chinese property stocks experienced a significant decline, with Country Garden's shares leading the way by reaching their lowest point in over eight months. This was triggered by renewed concerns about the debt situation of Chinese real estate developers. In response, China is implementing a series of measures to bolster its economy, especially ahead of a crucial Politburo meeting scheduled for this week, which will assess the country's economic performance for the first half of the year.
In the past week, the authorities made several pledges aimed at specific sectors and intended to reassure private and foreign investors about a more favorable investment environment. However, many of these measures were broad and lacked specific details.
Meanwhile, Japan's business activity showed growth for the seventh consecutive month, according to preliminary estimates by au Jibun Bank. The country's composite purchasing managers index (PMI) remained at 52.1 for July, unchanged from the previous month. However, the services PMI slightly decreased from 54 in June to 53.9, while manufacturing activity continued to contract, with the PMI declining from 49.8 to 49.4.
In Australia, private sector business activity declined for the first time since March, mainly due to a contraction in the services sector. Juno Bank's flash estimates showed a drop in the composite purchasing managers index to 48.3 from 50.1 in June. The services PMI fell below the no-change mark of 50, reaching 48, compared to 50.1 in June. On the other hand, manufacturing activity saw a milder contraction at 49.6, improving from 48.2 in June.
It's important to note that a PMI reading above 50 signifies an expansion in the sector, while a reading below 50 indicates a contraction.
Additionally, the HCOB Germany Composite PMI declined to 48.3 in July 2023 from June's 50.6, falling below the forecast of 50.3, as indicated by preliminary estimates. This suggests the first contraction in private sector activity so far this year and the most significant downturn since November. The decline was attributed to manufacturing production falling at the fastest rate since May 2020, mainly due to the rapidly declining demand for goods. Lastly, Spanish equities underperformed following an inconclusive outcome in the recent election held on Sunday, which generated uncertainty and weighed on investor sentiment.​
 
Hong Kong Stocks Rebound on China's Pledge, European Markets Cautious Amid Economic Data and Earnings
On Tuesday, Hong Kong stocks experienced a strong rebound, with the Hang Seng index surging over 3%. This surge was triggered by China's Politburo, which pledged to promptly "adjust and optimize policies" to address issues in its struggling property sector. Additionally, Beijing's top decision-making body promised to prioritize stable employment as a strategic goal and introduced other measures to stimulate consumption and tackle debt risks. This commitment came after disappointing economic data surfaced last week, prompting renewed calls for policy support to bolster growth.
Meanwhile, European markets are expected to open cautiously on Tuesday as investors carefully evaluate economic data and corporate earnings from the region. There will be a keen focus on various economic reports, such as the German business climate and British business optimism index data. Notably, companies like LVMH, Unilever, Deutsche Borse, Randstad, and Italgas are slated to report their earnings on the same day.
Recent data indicated a slowdown in business activity in France, Germany, and the U.K. during July, adding to recessionary concerns across Europe. Additionally, investors will be keeping an eye on the Eurozone bank lending survey on Tuesday, which can offer insights into borrowing trends ahead of anticipated rate hikes by both the Federal Reserve and the European Central Bank.
The week remains busy for global investors, with a series of corporate earnings announcements and central bank meetings in focus. The European Central Bank is scheduled to meet on Thursday, where policymakers are expected to announce a 25 basis point rate hike and provide guidance on their efforts to combat inflation in the final stages.
 
Global Stocks Decline Ahead of Fed's Rate Decision and Inflation Trends: Earnings Season Remains in Focus


Asian stocks declined, mirroring the drop in European equity futures, as investors adjusted their positions to mitigate risks in anticipation of the Federal Reserve's upcoming rate decision.
During the second quarter, Australia's consumer price index grew by 6% year on year, showing a decrease from the 7% recorded in the first quarter. This marks the second consecutive quarter of a slowdown in the inflation rate, following the 33-year high of 7.8% observed in the fourth quarter of 2022.
The Federal Reserve is anticipated to approve its 11th interest rate increase since March 2022. Markets have fully priced in a quarter percentage point hike, which would bring the benchmark borrowing rate to a target range of 5.25%-5.5%. If implemented, this would be the highest level for the upper boundary of the federal funds rate since January 2001. Investors will closely monitor signals from the Federal Open Market Committee, seeking indications that the members are confident enough in the fight against U.S. inflation to temporarily pause further rate hikes.
Consumer confidence in the US soared to a two-year high in July, reaching a reading of 117.0, attributed to a tight labor market and decreasing inflation. Nonetheless, the economy still faces uncertainties, with the Conference Board's survey providing mixed signals.
International Monetary Fund’s (IMF) upward revision to the global growth forecasts joins the previously released downbeat data from top-tier economies, which in turn flagged concerns of a sooner end to the rate hike cycle.
The focus remains on earnings season, with results from companies such as Deutsche Bank, Stellantis, GSK, Carrefour, and luxury goods giant LVMH. In the United States, investors are digesting an earnings beat from Alphabet and a slowdown in cloud revenue growth from Microsoft, in anticipation of results from Coca-Cola, Boeing, AT&T, Meta, Chipotle, and Mattel.
 
Asia-Pacific Markets Rise Amidst China's Fourth Consecutive Month of Factory Contraction; Central Banks Adjust Policies in Response to Economic Challenge
On Monday, Asia-Pacific markets saw gains despite China's factory activity remaining in contraction territory for the fourth consecutive month in July. The official manufacturing purchasing managers index (PMI) was 49.3, slightly higher than June's figure of 49.0, according to the National Bureau of Statistics. Additionally, the PMI for non-manufacturing activity came in at 51.5, indicating a slower rate of expansion compared to June's 53.2.
In Japan, the central bank made adjustments to its yield curve control. They allowed 10-year Japanese government bond yields to fluctuate within a range of approximately plus and minus 0.5 percentage points from its 0% target. Furthermore, the bank offered to purchase 10-year JGBs at 1% through fixed-rate operations, expanding its tolerance by 50 basis points. These measures were taken to address concerns about the prolonged impact of monetary easing on financial markets and the real economy. BOJ Governor Kazuo Ueda clarified that it is not a move towards policy normalization but rather a measure to enhance the sustainability of yield curve control. The bank also kept its ultra-loose interest rate at -0.1% and raised its median inflation forecast for fiscal 2023 to 2.5%.
Today, preliminary Eurozone inflation data will be released, and it is expected to show a further decline from June's 5.5%. This may provide some relief for policymakers. The European Central Bank's Christine Lagarde indicated last week that the bank was open-minded about the possibility of raising rates in September as inflation shows signs of easing.
The Bank of England is widely anticipated to raise interest rates by at least 25 basis points during its upcoming policy meeting on Thursday. This would mark the 14th consecutive increase, driven by the persistence of high U.K. inflation, which saw a slight drop to 7.9% in June.​
 
Asia-Pacific Markets Show Mixed Performance Amid China's Factory Contraction, Unemployment Rate Declines in Japan, and UK Housing Market Struggles in July 2023
On Tuesday, the Asia-Pacific markets exhibited mixed performance, triggered by China's factory activity entering contraction territory for the first time since April, as per the Caixin survey by S&P Global. The Purchasing Managers Index (PMI) for July registered at 49.2, falling short of economists' expectations of 50.3, as revealed by Reuters polls. This comes after yesterday's official statistics, indicating China's factory activity contracted for the fourth consecutive month, with a PMI reading of 49.3.

Meanwhile, in Japan, the seasonally adjusted unemployment rate for June decreased to 2.5%, slightly below the previous month's 2.6%, aligning with economists' predictions based on government data. Additionally, Japan's jobs-to-applicants ratio for June stood at 1.3, slightly lower than the Reuters forecast of 1.32.
Contrary to economists' expectations from Reuters polls, the Reserve Bank of Australia decided to maintain rates at 4.1%, instead of implementing a 25 basis points hike.

In Europe, several companies, including Euroapi, Uniper, Daimler Truck, DHL Deutsche Post, Covestro, BP, HSBC, Travis Perkins, and Diageo, are expected to release their earnings reports. Additionally, Eurozone unemployment data will be published.

In the United Kingdom, the Nationwide House Price Index for July 2023 experienced a notable decline of 3.8% compared to the previous year, accelerating from the 3.5% decrease observed in June, marking the largest fall in house prices since July 2009. This decrease in housing prices is attributed to subdued housing market activity due to stretched housing affordability for prospective homebuyers with mortgages.
Throughout the day, PMI updates will continue, encompassing figures from the Eurozone, including Germany, as well as from the UK and the US.
 
Central Banks' Moves and Economic Indicators: Japan's Policy Adjustment, New Zealand's Rising Unemployment, and Fitch's Rating Cut

The Bank of Japan has pushed back on speculation its recent policy adjustment marked the start of a tightening cycle.
Deputy Governor Shinichi Ichida on Wednesday reiterated the central bank’s flexible threshold for tolerance on long-term bond yields is merely a necessary modification to sustain its ultra-easy monetary policy position.
New Zealand’s unemployment rate increased to 3.6% in the second quarter, up from the 3.4% in the first quarter and higher than the 3.5% expected in a Reuters poll.
Most notably, job growth climbed 1% quarter on quarter, sharply higher than Reuters forecast of 0.5%.
Fitch Ratings cut the United States’ long-term foreign currency issuer default rating to AA+ from AAA on Tuesday, citing an erosion of governance and expected fiscal deterioration over the next three years.
In particular, the agency called out brinksmanship in Washington around debt ceiling negotiations earlier this year.
 
Service Sector Growth in China, Bank of England's Rate Hike Expectations, and Global Stock Market Performance
In July, China's service sector activity showed a stronger expansion, as indicated by the Caixin survey compiled by S&P Global. The service sector purchasing managers index reached 54.1, slightly up from June's 53.9. The survey report attributes this growth to a solid rise in business activity across the sector and a significant increase in overall new business, leading to six consecutive months of firms expanding their payroll numbers
In June, Australia's trade surplus declined to 11.3 billion Australian dollars ($7.4 billion) from May's AU$11.7 billion.
Private payrolls data showed that US companies added 324,000 workers last month, surpassing the consensus forecast of 190,000. In addition, investors reacted to news that the Treasury will issue $103 billion of securities next week, slightly more than forecast, and this comes shortly after Fitch Ratings' downgrade of the US.
The Bank of England (BOE) is considering a 25-basis point hike after last month's inflation rate showed some improvement, sitting at 7.9%, down from 8.7% in May. Despite the BOE's divergent stance from other central banks, high inflation levels and mixed labor and wage data may cause market apprehension about any unexpected moves similar to the half-point curve ball thrown at their previous meeting.​

Reuters Graphics
 
Central Bank Actions and Economic Outlook: Updates from Australia, China, and the UK

Australia's central bank has revised its growth outlook for 2023 to 1%, compared to the previous estimate of 1.25%. The Reserve Bank of Australia stated that economic activity in the country is expected to remain subdued due to cost-of-living pressures and rising interest rates affecting domestic demand. Despite this, the bank mentioned that inflation is improving and adjusted its inflation rate forecast to 4.25% from 4.5%. The bank anticipates a decline in inflation, reaching 3.75% by the end of 2024 and returning to the 2-3% target range by late 2025.

The People's Bank of China announced increased monetary support for the economy and assistance for banks in controlling liability costs. This decision came after discussions with executives from the property industry.

The Bank of England raised its main interest rate by 25 basis points, bringing it to a 15-year high of 5.25%, as a response to persistent inflation.

Investors are closely watching the European banking results and a significant US employment report is expected later on Friday. Preliminary data already indicated resilient demand for workers in the US, with a significant increase in productivity, offsetting labor costs. The forthcoming government employment data is projected to show the addition of 200,000 jobs in July, which, though lower than previous reports, still represents historical progress.
 
Insights from the Jackson Hole Economic Symposium: Navigating Uncertainty in Monetary Policy and Economic Shifts

The annual Jackson Hole Economic Symposium, held in the scenic state of Wyoming, is a magnet for economists, reporters, and investors eager to glean insights into the economic horizon. This year's gathering saw prominent central bankers emphasize the continued necessity of elevated interest rates until inflation is brought under control. The discussions, taking place at the Federal Reserve's yearly assembly in Jackson Hole, delved into the challenges posed by shifting economic landscapes.
Keynote speeches from Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde underscored the complexities they confront in determining whether to prolong the sequence of rate hikes that commenced the previous year. Despite their speeches, their intentions for the future remained veiled.
The symposium became a crucible for dialogues encompassing diverse concerns including productivity, innovation, the architecture of bond markets, the interconnectivity of global supply chains, and the ascent of public debt. It was acknowledged that central banks confront limitations in addressing structural transitions, exacerbating the intricacies of monetary policy formulation.
Internal debates within the Federal Reserve and the European Central Bank harmonized with the symposium's discussions, revolving around the quandary of heightening borrowing costs amidst persistent inflation and economic ambiguity. Powell and Lagarde admitted the challenges but abstained from divulging their forthcoming strategies.
Among the inner circle of Powell and Lagarde, dissenting viewpoints arose regarding the necessity of further rate hikes. While some urged cautious progression, taking into account potential repercussions, others championed a bolder approach.
The event dissected the potential effects of evolving trade patterns on the sensitivity of monetary policies and the overall economic robustness. Policymakers also scrutinized the ramifications of burgeoning budget deficits on the orderly functioning of the Treasury market.
In a gesture of humility, Lagarde accentuated the importance of acknowledging the uncertainties inherent in the current economic panorama. She stressed that embracing uncertainty is pivotal to upholding the credibility of central banks and fostering public trust.
 
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