Asia wrap: Deflation sensation

Summer is well underway, and it's far from dull as US stocks continue to perform strongly, setting 15-month highs. Unfortunately, Asian peers are not taking the usual piggyback signal, trading mostly lower this morning, erasing earlier gains as China's growth concerns darken the regional outlook and weigh on local risk sentiment.

Evidence is emerging that US growth could hold up even though inflation does seem to be subsiding. Diminishing headwinds from monetary and fiscal policy tightening, strong consumer income growth, and an emerging bottom in the housing and manufacturing sectors suggest that positive growth impulses may overcome the drag from reduced bank lending in the months ahead.

One key difference between this economic cycle and all that have preceded it since the 1970s is the role of supply in driving inflation. So a soft landing can not happen without the supply coming back. and the past month has provided notably better news on this front.

Measures of bottleneck inflation have not only unwound the entire spike from COVID but are now sitting at the lowest level since records began in the mid-1990s. And this is corroborated by other pipeline measures, such as China producer prices and the price component of the PMIs, which are also in deflationary territory. Suggesting the fall in inflation has less to do with Fed hikes and more about post -Covid normalization. That's a good thing, as subsiding inflation will not happen in US isolation; it will be global. Inflation will tumble everywhere.

The latest case in point, UK inflation cooled significantly in June, coming in below consensus expectations at 7.9% annually. And while bad for the pound, markets will be inclined to reprice and lower the path of interest rates; mortgage relief could mercifully be around the corner. Indeed the deflation sensation finally came to the UK.

Government bond yields are trending lower as the soft landing narrative engulfs global sentiment.