Asian Market Update: China July industrial production and CPI disappoint; Korea and Japan central banks leave rates on hold but remain cautious on recovery

- Asian equity markets are trading with a far more cautious tone after US traders took some profits and China economic data failed to live up to expectations of signaling a more pronounced recovery. A pair of central bank decisions from Japan and Korea - while standing pat on interest rates - also saw some rather cautious sentiment both in terms of price trends and financial conditions. With about 90 minutes of trading left in Tokyo, Nikkei225 is up about 0.1% to just below 10,500.
Korea's Kospi and S&P/ASX are also up just marginally weighed by the tech and basic materials sectors, while India markets lead the decliners in the wake of a powerful 7.7 earthquake off the coast briefly prompting tsunami warnings.

- China posted its economic performance metrics for the month of July, with the primary sets of numbers coming short of estimates. Y/Y industrial production registered its third consecutive monthly improvement at 10.8% but still came in below 11.5% expected. YTD, industrial production rose 7.5%, also softer than 7.7% forecast. Markets were also hoping for an improvement in inflationary figures after multi-year lows in June, but both CPI and PPI once again registered record negative results since at least 2003. CPI was seen at -1.8% v -1.6% expected, while PPI came in at -8.2% - better than -8.3%e, but still down from -7.8% prior. Despite these results, China Stats bureau did note that overall m/m prices are showing an upward trend. In other Chinese data for July, trade figures and retail sales were generally in line with estimates. Retail sales were seen up 15.2% v 15.0% expected and trade surplus came in at $10.6B, exports fell -23%, and imports declined 15%. Notably, metal as well as crude imports were all firmer on m/m basis, reflecting the rise in commodity demand also expressed by Chinese press commenting on expectations of sharp increase in auto sales. Lastly, China reported its overall commodity and energy output data that saw crude steel rising 13% and electricity production up 4.8% on y/y basis.

- Bank of Japan stayed at 0.10% in a unanimous decision, also maintaining its current economic assessment after several months of upgrade on conditions. Policymakers said exports were picking up and recovery was still expected in the second half. However, the BOJ also said downside risks remain high, business investment continued deteriorating, and domestic consumption was not improving because of poor employment conditions. Moreover, credit conditions were still tight and downside price risks still required monitoring. Earlier, Japanese government also kept its monthly assessment unchanged, commenting on the ongoing difficult conditions in corporate investment and profitability.

- South Korea's central bank was slightly more upbeat, keeping rates unchanged at 2.00% but pointing its bias toward a tightening amid "favorable movements" in economic activity. BOK did note that concerns about credit risk in financials have not yet been resolved and some degree of uncertainty did remain, justifying accommodative policy stance for the time being. Governor Lee also saw a faster than expected recovery, pledging to monitor housing prices and mortgage loan growth to avert an overinflated real estate bubble. Elsewhere, Deutsche Bank raised its assessment on Korean equities, estimating the Kospi will reach 1,830 by the end of 2009, but South Korean President said employment, corporate investment, and domestic demand were still far from a sustained recovery.

- In other economic data, Australia's July NAB business conditions and confidence improved, rising to multi-month highs of +1 and +10 respectively. Over in Singapore, Q2 Final GDP improved further, topping estimates of expected decline from preliminary levels. Y/Y was seen at -3.5% v -4.0%e and -3.7% prior, while Q/Q rose 20.7% v 19.2% expected and 20.4% prior. Singapore govt reiterated it was unclear if manufacturing gains were sustainable, with few signs of turnaround in demand pointing to a sluggish second half of the year. Singapore Central Bank, commenting on economic update, said it was appropriate to keep above-normal liquidity conditions as evidence of external demand from the US was not yet apparent.

- In equities, Nippon Life (0001.JP) was rumored to post a 20% y/y decline in Q1 operating profit at ¥96B due to lower interest income from foreign securities holdings. Aeon (8267.JP) confirmed it would acquire a 55% stake in Mitsubishi Corp's Digital Direct unit, and Seiko (8050.JP) posted a wider Q1 loss than in the prior year but forecasted improvement in FY09/10 performance. Outside the Nikkei, Fortescue and Chinese sovereign wealth fund CIC were said to be in advanced talks for a $1B in convertible bond investment after shares of the Aussie miner plummeted on poor earnings over the prior session. Rio Tinto continued to trade lower in the aftermath of more serious espionage accusations by the Chinese officials earlier this week.

- In currencies, Australian and Kiwi dollars led the decliners following worse than expected industrial sector data from China, while JPY traded higher across the board on moderate risk aversion in the session. AUD/USD fell to August lows below 0.8330 and NZD/USD fell as low as 0.8330. Japanese Yen firmed to 96.50's and 136.50's against USD and EUR, up about 70 pips. AUD/JPY collapsed about 100 pips for a session low just under 80.40. In European majors, EUR and GBP ranged around 1.4140 and 1.65 against USD, with USD/CHF also trading sideways near 1.0850.

- Crude oil prices have moved off the session's best levels, following China's weaker than expected July industrial production data. In terms of oil demand, China reported that its crude oil imports in July rose to 19.6M tons v 16.6M in June. China's July iron ore imports rose to a new record high of 58.1M tons from 55.3M in June. Additionally, China's July copper scrap imports rose to 450K tons from 280K tons m/m, while copper imports declined to 406.6K tons from 476K tons in June. The m/m decline in China's copper imports comes after the Chinese government disclosed in late June that it has completed its metal stockpiling program. Metals buying by China has been cited as one of the main factors which drove the recent rally in copper prices. Spot Gold prices are little changed, after declining by more than $12 in NY trading.