FX - The Week Ahead: China’s tepid recovery under pressure once again as export momentum slows

Little to cheer about from China’s seasonal beat on CPI and PPI

• CNH: Data released Friday shows China’s inflation readings beating expectations in July. Headline CPI inches up to 0.5%YoY, a small beat relative to expectations for 0.3% YoY and the prior month’s 0.2% YoY and the highest reading since April 2023 excluding Chinese New Year months. Sequentially, CPI rises 0.5%MoM, also a high reading in the past two years, excluding CNY months. However, core inflation inches down to 0.4%YoY despite a sequential change of +0.3%MoM, back to the lowest level since early 2021.
   
• CNH: Meanwhile, China’s PPI also beats expectations, staying at -0.8%YoY versus consensus looking for a -0.9%YoY decline and the sequential change records -0.2%MoM, unchanged from June. The small “beat” in July however, could be short-lived, with commodity prices softening into August with property woes and soft demand also contributing to a drop in PPI deflation.
   
• CNH: Overall, the small beat in CPI is mostly driven by supply-side factors and core inflation inches down in July. Meanwhile, PPI sees downside risks from commodity prices in the months ahead as well as overcapacity and insufficient demand. Demand side efforts, ranging from durable goods support to a rate cut, have accumulated further since mid-July. Those steps, however, don’t mark a shift in policy paradigm.

China’s export momentum slows in July and faces further headwinds ahead

• CNH: Data released earlier this week shows China’s showed export growth unexpectedly slowing in July. Exports rise 7% YY in July in USD terms, falling short of consensus expectations for a 9.5% gain and the prior month’s 8.6%. On a seasonally adjusted basis, exports decline by 4.4% MM, suggesting weaker export momentum in July. The slowdown is primarily led by weaker shipments to non-traditional markets, followed by softer exports to ASEAN (a destination that China is looking to diversify its exports to from the US). Meanwhile, imports beat expectations, rising 7.2% YY in USD terms against consensus looking for just 3.2% and narrowing the trade surplus to US$84.65bn from the previous month’s US$99.05bn.
   
• CNH: The slowing in export growth has been already reflected in the release earlier of the new export orders subcomponent of China’s official manufacturing purchasing managers’ index that contracted for a third straight month in July. More concerning however is that slowing export growth follows the weakest quarterly GDP in five quarters in Q2 and suggests China’s export-driven growth strategy will be more difficult to achieve this year given the slowing US economy, threats of additional tariffs and ongoing technological decoupling.

• CNH: Meanwhile, the surge in imports likely reflects semiconductor makers rushing to front-load equipment orders amid a potential tightening of US curbs on chips exports rather than an improvement in domestic demand. This has fueled a 15% surge in the products’ imports in July from a year ago while imports of crude oil have also climbed 8%, as the Chinese government renews import quotas to companies for the second half of this year. The trade data is becoming more volatile as “tit-for-tat” trade policy moves could potentially destabilize market expectations and lead to front-loading and stockpiling behavior. The EU has increased tariffs on Chinese EVs and China has launched various probes in return. Following the recent strategic tariffs, US-China tariff disputes are also likely to continue into the US elections. 

Mixed details of July’s employment report to keep BoC cutting 25bp in September 

• CAD: Canada’s July jobs data released Friday shows employment falling by 2.8k jobs, the second consecutive pullback in employment while also weaker than consensus expectations for 25k. Goods producing industries add just 12.1k jobs while services lose 14.8k. Despite the modest job loss, the unemployment rate remains unchanged at 6.4% as the labor force participation rate falls from 65.3% to 65.0%. Hourly wages of permanent employees also pulls back from 5.6%YoY to 5.2%YoY, less slowing than expected.
   
• CAD: While the overall July employment data is consistent with a further weakening in Canada’s labor market, details appear mixed enough to keep the BoC cutting rates by just 25bp at their next meeting on September 4th as wage growth remains stubbornly strong around 5% despite a loosening labor market and hours worked rise a solid 1%MoM, suggesting a solid start to activity in Q3. However, Citi Research continue to expect that a weakening labor market and softer demand in the US will lead to softer activity than the BoC’s latest 2.8% Q3 GDP forecast.
   
• CAD: The July employment report presents a complicated backdrop for BoC as the last monthly employment report (for either the US or Canada) received before the September 4 decision. Overall, Citi Research continue to expect a 25bp cut at the September meeting as officials have already lowered rates by 50bp and could be cautious to not diverge too substantially from the Fed. But risks still skew towards a larger 50bp cut if upcoming data are weaker. Citi Research also expect the BoC to cut rates by 50bp at the October meeting.

Week Ahead:

US – Inflation, retail sales and industrial production data in focus this week

• USD: US July CPI MoM – Citi: 0.3%, median: 0.2%, prior: -0.1%; CPI YoY – Citi: 3.0%, median: 2.9%, prior: 3.0%;
   
• USD: CPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.1%; CPI ex Food, Energy YoY – Citi: 3.2%, median: 3.2%, prior: 3.3% - there are a number of reasons to expect core inflation consistent with 2% in the second half of the year, and while core CPI in July may not be quite as soft as in June, Citi Research expect a modest 0.18%MoM increase but with risks tilted more towards the downside. The key downside risk would be a further slowing in shelter inflation. Services prices should also be modest in other components, with underlying pressures easing as the labor market loosens and wage growth slows. Goods prices should also be modest, with core goods essentially flat on the month. Meanwhile, headline CPI should rise a stronger 0.3%MoM due to rising energy prices but remain at 3.0%YoY.
   
• USD: US July PPI Final Demand MoM – Citi: 0.3%, median: 0.2%, prior: 0.2%; PPI Final Demand YoY – Citi: 2.4%, median: NA, prior: 2.6%; PPI ex Food, Energy MoM – Citi: 0.3%, median: 0.2%, prior: 0.4%;
   
• USD: PPI ex Food, Energy YoY – Citi: 2.7%, median: NA, prior: 3.0%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.3%, median: 0.2%, prior: 0.0%; PPI ex Food, Energy, Trade Services YoY – Citi: 3.1%, median: NA, prior: 3.1% - PPI in July, released the day before July CPI, should be modestly stronger than in June, with a 0.3%MoM increase in PPI final demand and a similar increase in core PPI that excludes food, energy, and trade services. Details of PPI will continue to be a useful gauge of underlying inflationary pressures, particularly for various goods prices. But in general, even if input costs are rising, the ability of businesses to pass costs on to higher consumer prices is likely very limited.
   
• USD: US July Industrial Production – Citi: -0.9%, median: 0.0%, prior: 0.6%; Manufacturing Production – Citi: -0.9%, median: NA, prior: 0.4%; Capacity Utilization – Citi: 77.9%, median: 78.7%, prior: 78.8% - industrial production, and its largest subset of manufacturing production, has been surprisingly strong in the last few months, but Citi Research expect that trend to end in July with a 0.9% decline in both total IP and manufacturing data. Softening manufacturing production in the coming months would be consistent with generally leading indicators like the production component of the ISM manufacturing survey.
   
• USD: US July Retail Sales – Citi: 0.2%, median: 0.3%, prior: 0.0%; Retail Sales ex Auto – Citi: -0.1%, median: 0.1%, prior: 0.4%; Retail Sales ex Auto, Gas – Citi: -0.2%, median: 0.2%, prior: 0.8%; Retail Sales Control Group – Citi: 0.1%, median: 0.1%, prior: 0.9% - retail sales surprised higher in June with particular strength in control group which was driven by the non-store category. Some of the boost could have been related to the more favorable seasonal adjustment in June of this year which would imply downside risk for July retail sales. Citi Research expect control group sales to increase by a modest 0.1%MoM but see mainly downside risks to the forecast.
   
• USD: US August (preliminary) University of Michigan Sentiment – Citi: 67.7, median: 66.8, prior: 66.4; 1 Year Inflation Expectations – Citi: 2.9%, median: 2.9%, prior: 2.9%; 5-10 Year Inflation Expectations – Citi: 2.9%, median: NA, prior: 3.0% - the University of Michigan sentiment index has been falling in recent months and has generally been at low levels compared to historical ranges as elevated prices and worsening finances and buying conditions have weighed on sentiment. Citi Research expect a modest rebound in sentiment to 67.7 from 66.4 in the August preliminary reading with mainly downside risks as the labor market has been weakening and this might increase consumer worries about losing jobs. Citi Research expect the labor market to weaken further in coming months which would pose further downside risk for confidence. 1y Inflation expectations have declined to lower levels and Citi Research expect the median reading to stay unchanged at 2.9% in August and for 5-10y inflation expectations to edge lower to 2.9% from 3.0%.

Europe, UK – German ZEW, Q2 GDP and UK jobs, CPI, Q2 GDP and retail sales data in focus this week

• EUR: German and euro area ZEW survey for August: Germany: ZEW survey expectations – Consensus 31.8, Prior 41.8; Current situation – Consensus -75.0, Prior -68.9 (to show a worsening in conditions); Euro area – Prior 43.7.
   
• EUR: Euro area Q2 GDP (preliminary estimate): GDP SA QoQ – Consensus 0.3%, Prior 0.3%; GDP SA YoY – Consensus 0.6% Prior 0.6%.
   
• GBP: UK labor force report: ILO unemployment rate June (3mths) – Consensus 4.5%, prior 4.4%; Employment change June (3m/3m) – Consensus -7k, Prior 19k; Payrolled employees monthly change July – Prior 16k; Claimant count rate – Prior 4.4%; Jobless claims change – Prior 32.3k; Average weekly earnings June (3m/ YoY) – Consensus 4.6%, Prior 5.7%; Weekly earnings ex-bonus June (3m/ YoY) – Consensus 5.4%, Prior 5.7%.
   
• GBP: UK CPI report July: Headline CPI MoM – Consensus -0.1%, Prior 0.1%; Headline CPI YoY – Consensus 2.3%, Prior 2.0%; Core CPI YoY – Consensus 3.4%, Prior 3.5%; UK Q2 GDP (preliminary) QoQ – Consensus 0.6%, Prior 0.7%.
   
• GBP: UK Q2 GDP (preliminary) YoY – Consensus 0.9%, Prior 0.3%; Headline retail sales July (MoM) – Consensus 0.6%, Prior -1.2%; Headline retail sales July (YoY) – Consensus 1.4%, Prior -0.2%; Retail sales ex autos and fuel (MoM) – Consensus 0.9%, Prior -1.5%; Retail sales ex autos and fuel (YoY) – Consensus 1.4%, Prior -0.8%.

Japan – Q2 GDP in focus this week

• JPY: Real GDP to increase 1.9% QoQ annualized in Q2 in reaction to negative growth in Q1 — Citi Research estimate real GDP increased 0.5% QoQ and 1.9% QoQ annualized in Q2. Auto supply disruptions drove the economy into negative growth in Q1, but a rebound is expected in Q2 as auto production resumed. However, the expected rebound probably failed to fully offset the decline in Q1. Citi Research expect a full-scale recovery for the Japanese economy will depend on the extent of spring wage hike results reflected in wages from Q3.

Commodity Bloc – A dovish RBNZ meeting in focus this week

• AUD: RBNZ Board meeting : Citi Forecast 5.5%, Consensus 5.5%, Prior 5.5% - Still sticking with -50bps in Q4’24 for the RBNZ. The latest activity and CPI data supports Citi Research’s long-held view that NZ inflation would undershoot the RBNZ’s forecast leading to earlier than expected interest rate normalization. This has been confirmed by the MPC’s dovish pivot at the July meeting, which sets the scene for a revision of the OCR path at this week’s MPC meeting. Current guidance is for easing to begin in Q3’25. This should be brought forward to Q4’24. Citi Research continue to expect -50bps from the OCR at the 27 November MPC meeting followed by -150bps by Q3’25 for a terminal rate of 3.50%.
   
• AUD: But the risk is towards an earlier OCR cut - in May the MPC was more hawkish, arguing that low productivity growth may have lowered potential GDP and implied an economy with ongoing capacity constraints and sticky non-tradeables inflation. These concerns were jettisoned in July with the MPC stating that capacity constraints have eased and that high interest rates could be feeding through to domestic demand more than previously expected. Yet there was no new data between these meetings to support such a significant policy shift. The RBNZ’s business liaison may have advised of weaker forward conditions including in employment and prices, which should also lead to a downward revision on inflation forecasts by the RBNZ. The risk is that the MPC cuts the OCR as early as this week.

Asia EM – China activity, money supply and credit data in focus this week

• CNH: China Industrial Production (%YoY) Jul – Citi Forecast 4.8, Consensus 5.4, Prior 5.3 - July could enjoy some favorable base effects, but high-frequency data pointed to weaker momentum amid weather disruptions – crude steel output declined -4.2%YoY in the first 20 days of July vs. -2.1%YoY in June.
   
• CNH: China Retail Sales (%YoY) Jul – Citi Forecast 2.8, Consensus 2.6, Prior 2.0 – the CPCA projected auto sales down -2.2%YoY in July vs. -6.8%YoY in June (CPCA, July 26). Restaurant revenue may enjoy some support from summer holiday effect, although consumer confident remained low in general.
   
• CNH: China Fixed Assets Ex Rural (YTD, %YoY) Jul – Citi Forecast 3.9, Consensus 3.9, Prior 3.9 - similar to IP, base effects could help, yet construction PMI, government bond issuance and soft commodity prices could all be indicating downside risks.
   
• CNH: China Money Supply (M1, %YoY) Jul – Citi Forecast -5.0, Consensus -5.3, Prior -5.0; Money Supply (M2, %YoY) Jul – Citi Forecast 6.2, Consensus 6.0, Prior 6.2 - despite the soft data, credit growth as well as monetary base growth could find a tentative trough in July. The focus could be particularly on M1, and its stabilization could mark a conclusion of deposits clean-up since this April.
   
• CNH: China New Yuan Loans (CNY bn) Jul – Citi Forecast 350, Consensus 438, Prior 2130; Aggregate Financing (CNY bn) Jul – Citi Forecast 800, Consensus 1000, Prior 3300 - July is a low season for new credit, and this year is no exception amid weak domestic demand. Government bond issuance (RMB673bn this July) and corporate bond issuance (RMB292bn) may not be able to offset weakness in the non-government sector. PBoC’s rate cut in July may not have much impact for this month’s data.