Morgenbud: China will cut interest rates, but by how much?

June 20 (Reuters) – A look at the day ahead in Asian markets from financial markets columnist Jamie McGeever.

The People’s Bank of China takes center stage on Tuesday with an almost certain rate cut, according to the expectations of investors, who are also trying to read the political tea leaves from US Secretary of State Antony Blinken̵[ads1]7;s visit to Beijing.

Trading volume across the region should pick up after US markets closed on Monday for June 10, and trade in Malaysian industrials, Japanese industrial production and inflation data from Hong Kong could all move asset prices in those countries.

However, all eyes are on Beijing.

All 32 market observers in a Reuters poll said the PBOC would cut key lending benchmarks for the first time in 10 months, as authorities battle to shore up a slowing recovery in the world’s second-largest economy and stave off the threat of deflation.

The PBOC last week lowered short- and medium-term key interest rates, paving the way for lower reference borrowing costs. Most survey participants expect the one-year prime lending rate to be cut by 10 basis points to 3.55%, and half said they predict a deeper cut of at least 15 bps to the five-year LPR.

The weakness in recent economic data suggests that the expected easing of policy on Tuesday will be on the aggressive side and will be followed by further easing in the coming months.

Several major banks have cut their 2023 GDP growth forecasts for China to a range of 5.1% to 5.7% from a previous range of 5.5% to 6.3%.

Chinese shares posted their biggest drop in two weeks on Monday, but the weakness was not limited to China. The MSCI World index came off last week’s 14-month high, Japan’s Nikkei lost 1%, and Hong Kong tech and the MSCI Asia ex-Japan index both had their biggest drops in three weeks.

That is the economic and market backdrop for US Secretary of State Blinken’s visit to Beijing, which ended on Monday with all the diplomatic courtesies and protocols one would expect, but without any major breakthrough for investors to cling to.

The two countries agreed to stabilize their rivalry so it does not spill over into conflict, hailed “progress” and stressed the importance of a more stable relationship. But they appeared entrenched in their positions on everything from Taiwan to trade, including US actions against China’s chip industry, human rights and Russia’s war on Ukraine.

The yuan remains under pressure, anchored near seven-month lows against the dollar, and sentiment against the Chinese currency will not have been boosted by the favorable start to yuan-denominated trading in some Hong Kong stocks on Monday.

The 24 companies that debuted with the yuan-denominated share trading scheme attracted a small fraction of the shares’ trading volume, as interest in using the new currency option was dwarfed by the Hong Kong dollar.

It’s early days, of course, but perhaps another reminder that the yuan’s road to internationalization is very long.

Here are key developments that could give more direction to the markets on Tuesday:

– China’s interest rate decision

– Japan’s industrial production (April)

– Malaysia Trade (May)

By Jamie McGeever; Editing by Lisa Shumaker

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