Marketmind: China to hold rates steady, markets digest G7

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

The People’s Bank of China is expected to keep key lending rates on hold on Monday, as traders in Asia digest the implications of the G7’s stance on China and the tense and fluid situation in Washington regarding the U.S. debt ceiling standoff.

Looking further into the week, the main regional drivers for Asian markets are likely to be policy decisions in New Zealand, South Korea and Indonesia, inflation figures from Singapore and Malaysia, and Japanese unemployment and retail sales figures.

In their joint communique on Saturday, G7 leaders said they are looking to “de-risk, not decouple” economic engagement with China. Neither are they turning inward, and nor do they want to hamper China’s economic development, they said.

But Chinese markets have weakened sharply in recent weeks as economic indicators have fallen off a cliff, against the backdrop of major world powers appearing to reconsider their long-term investment strategy towards China.

The has fallen through the 7.00 per dollar barrier but is unlikely to get any immediate policy support, as the PBOC is expected to leave one-year and five-year loan prime rates unchanged on Monday at 3.65% and 4.30%, respectively.

If anything, the weak economy and evaporating inflation could steer the PBOC towards easing policy in the coming months.

It could not be more different in Japan. Stocks have powered to a 33-year high, the economy grew much faster than expected in the first quarter, and the Bank of Japan could soon start to reverse its ultra-loose policy. Investors like what they see.

Wider market sentiment on Monday could be set by the mood music in Washington around the debt ceiling. President Joe Biden and House Republican Speaker Kevin McCarthy will meet after a “productive” phone call on Sunday as the president returned from the G7 summit.

McCarthy said on Sunday there were positive discussions on solving the crisis and that staff-level talks will resume ahead of his meeting with Biden. Markets will see this as progress.

On the other hand, Treasury Secretary Janet Yellen reiterated that June 1 remains a “hard deadline” for raising the debt ceiling. If not, the government will likely run out of cash and fail to meet all its commitments through June 15, when more tax receipts are due.

Time is running out and as long as there is no deal, a U.S. default, a potential catastrophe for world markets, cannot be completely ruled out.

Later this week the Reserve Bank of New Zealand is expected to raise its cash rate one last time by 25 basis points to 5.50%, while Bank of Korea and Bank Indonesia are seen keeping their benchmark rates on hold at 3.50% and 5.75%, respectively.

Here are three key developments that could provide more direction to markets on Monday:

– China loan prime rates decision

– Japan machinery orders (March)

– Euro zone consumer confidence (May)

(By Jamie McGeever; Editing by Chris Reese)