The Week At Glance: A look at US Cycle indicators. You sure consensus is right?
Welcome to the “Week at a Glance,” where we examine the key releases and themes for the week ahead through the lens of macro trading.
China has reduced the 7-day repo rate by 10 basis points, following up with a cut in the loan prime rate. This move mirrors the strategy from June 13, 2023. Notably, the USDCNH exchange rate did not rise immediately following those previous cuts; instead, it decreased in the subsequent days.
The 7-day repo rate targets the banking sector and its liquidity operations. This also highlights that domestic demand in China remains very weak, which could lead to increased exports of excess capacity, particularly in the copper market, as the Plenum last week didn’t result in any major short-term stimulus (outside of the already known special bond issuance).
A 10 basis point cut in the loan prime rate, following the June 2023 precedent, temporarily stabilized the USDCNH due to renewed hopes for momentum in the Chinese economy. While these liquidity and momentum hopes are generally positive for Chinese assets, they need to be supported by data and potentially a softer tone from the FOMC at the July meeting to have a significant impact.
This morning, reactions in the markets have been moderate, with gold and USDCNH showing minimal changes and silver even declining. Following the June 2023 playbook, you should not expect metals buying on the back of this.
Chart 1: Market moves after the latest Chinese rate cut package
Are US cycle indicators rebounding right, left and center in coming months, and will inflation expectations follow? It sure looks like it from our model package. Meanwhile, don’t expect the Chinese rate cut to lead to metals buying.
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