11-8-2023 (SYDNEY) Asian stocks faced a challenging week as they edged towards a loss, while the US dollar enjoyed a month of gains following the release of steady US inflation data that failed to deliver the anticipated downside surprise.
The bond market was also affected by soft demand at a 30-year Treasury auction and a significant increase in the US budget deficit last month. As a result, bond yields rose, driving up the value of the dollar, particularly against the yen, which has been restrained by yield control measures in Japan.
On Friday, the yen hit a six-week low of 144.89 per dollar, although trading volumes were thin due to a public holiday in Japan. Japanese stock markets remained closed, and Treasuries went untraded during the Asian session.
The MSCI Asia-Pacific index, excluding Japan, slipped 0.2%, heading towards a 1% weekly loss.
US Consumer Price Index (CPI) figures for the headline inflation rate were 0.2% last month, matching the previous month’s numbers. The details of the report were encouraging, with core goods inflation showing signs of slowing down, although rents remained persistently high.
However, later in the day, San Francisco Fed President Mary Daly told Yahoo Finance that while the inflation data was positive, there was still more work to be done by policymakers.
Andrew Lilley, chief rates strategist at investment bank Barrenjoey in Sydney, noted that the market had hoped for a more dovish stance from Fed speakers following the inflation data, indicating that further rate hikes were unlikely and that the next move could be a cut.
Initially, benchmark 10-year Treasuries rallied on the inflation news, but yields ended the day seven basis points higher at 4.11%. Two-year yields rose two basis points to 4.82%, and thirty-year yields jumped six basis points to 4.24% after a $23 billion auction that exceeded market expectations. Primary dealers were left with 12.5% of the sale.
Sally Auld, chief investment officer at wealth manager JB Were in Sydney, expressed concerns that the market was struggling to digest the larger supply story from the US Treasury, as evidenced by the higher yields and lower dealer take-up.
The July US budget deficit also exceeded market expectations, reaching $221 billion, more than double the forecast. This pushed the year-to-date deficit beyond $1.6 trillion, compared to less than half that amount the previous year, indicating a trend of increased borrowing.
In the foreign exchange market, the release of the inflation data led to choppy trading conditions. Traders concluded that US interest rates were unlikely to decrease in the short term, resulting in the US dollar poised for a weekly gain.
The euro remained marginally lower for the week at $1.0988. Meanwhile, the yen faced a weekly loss of 2% as traders saw the Bank of Japan’s looser cap on 10-year yields as a temporary measure to keep shorter-dated rates low.
In the stock markets, Chinese property stocks experienced a decline due to the struggling giant developer Country Garden, which projected a net loss of $7.6 billion in the first half of the year. Country Garden’s stock fell by 11%, and the mainland developer index dropped 2.3% to a nearly three-week low.
On a positive note, shares of Alibaba in Hong Kong rose by 3.8% after the e-commerce giant reported its best quarterly revenue in two years. However, the broader Hang Seng index remained flat. Additionally, shares of the beleaguered Australian casino operator Star Entertainment surged by 20% after securing tax concessions from the New South Wales state government.
In the commodity markets, European gas prices experienced volatility due to concerns of a potential strike at Australian gasfields. Chevron and Woodside are currently in talks with workers regarding pay and conditions at facilities that supply approximately 10% of the world’s liquefied natural gas.
Brent crude futures were expected to end the week steady at $86.67 per barrel. Later on Friday, British growth figures and US consumer confidence data were scheduled for release, which could provide further market insights.
