Markets unfazed after US and Chinese officials phone call

Summary:

• US and Chinese trade negotiators had a phone call on Tuesday, the White House informed
• Chinese consumer inflation remains unchanged in June, pork prices continue surging
• Chinese factory prices stop increasing, fears over a return of deflation are back again

Talks about talks

The White House informed yesterday that trade negotiators from the United States (US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin) and China (Vice Premier Liu He) held a phone call on Tuesday. Nevertheless, it looks like we are far away from any trade agreement between the two feuding countries as yesterday’s negotiations focused on talks about having a face-to-face meeting. Thus, markets’ hopes concerning a swift return to the negotiating table have reduced to some extent, hence no one should be surprised seeing a mild response from financial markets to this statement from the WH. On top of that, we were also offered quite downbeat comments from White House Chief Economic Adviser Larry Kudlow who suggested that the US and China might never reach a trade deal due to the difficulty in resolving the remaining issues. On the other hand, he stressed that he was an optimist by nature and still believed a deal was possible. Furthermore, Kudlow confirmed that China had not begun buying more US goods yet (there were some information right after the G20 summit that Beijing could ramp up purchases of some US agricultural products). By and large, one may suppose that any deal is very distant if both sides discuss barely whether to hold a meeting. This does not bode well for the global economy as it suggests that this serious drag on growth is likely to persist.

The US dollar has had a perfect start to the new half of the year. Its strength has arisen immediately after the splendid jobs report for June as it has dialed back expectations regarding aggressive monetary easing there. Keep in mind that today’s Powell testimony before the House Banking Committee may affect the greenback markedly. Source: xStation5

Chinese inflation problem

Chinese consumer prices held at 2.7% in annual terms in June, matching the median estimate in a Bloomberg survey. At the same time, producer prices decelerated to 0% from 0.6%, falling short of the consensus calling for a 0.4% YoY increase. The details of the data showed that pork prices continued surging last month by 21.1% YoY, 2.9 percentage points higher compared to May. This suggests that African swine fever continues taking its toll exerting upward pressure on meat prices in general (a substitution effect). In addition to elevated meat prices, fresh fruit prices rose by stunning 42.7% YoY, 16 percentage points higher compared to May. Nevertheless, it is very unlikely these high prices are convincing signals to the PBoC to hike interest rates as they are fully driven by a supply side. Moreover, one may notice that the Chinese economy may be showing signs of fading domestic demand as PPI stopped rising last month. It has increased fears of a return of deflation which would erode companies’ profits as well as reduce their ability to repay debt. What’s more, if this is a longer-term trend, it could negatively affect the global inflation outlook too at a time when many central banks lack of room to maneuver.

Chinese PPI slowed to 0% in June raising concerns regarding a return of deflation there. Source: Bloomberg

In the other news:

• Turkey’s Erdogan said that the fired head of CBRT did not communicate well with markets

• API report showed US crude inventories fell 8.1 million barrels last week, gasoline inventories declined 0.3 million barrels

• Japanese PPI fell 0.1% YoY in June after rising 0.6% YoY in the prior month