FOREX: FOREX: Softer US Yields Aid Yen, CHF Gains, Amid On-going Fed Speculation

• New aggregate financing for July slowed to CNY770bn
• Year to date financing of CNY18.9tn to July 2024 was slightly below market expectations of CNY19.1tn and a 14% year on year decline.
• New CNY loans contracted mainly driven by weaker than expected loan extensions.
• New CNY loans to the real economy declined for the first time since 2005.
• Total aggregate financing grew from June to July, with the primary driver being government bond issuance.
• Government bond net issuance increased to CNY 929bn vs. RMB 768bn in June.
• Expectations are that this issuance trend will continue post Plenum given the maturity profile
• Corporate bond issuance increased by RMB 202.8bn in July, bringing the year-to-date growth to 23.9% YoY.
• Equity financing growth continued to grow for the sixth straight month at CNY23bn.
• Weak household and business demand continues to underscore the sentiment issues facing the economy following the real estate market decline. The turnaround in this demand will be key to understanding whether the real economy has bottomed.
• The patterns seen in both government and corporate bond issuance remains encouraging and given this data is prior to the recent surprise rate cut, there may be upside potential to the number going forward.
• That said there is enough in the household and business demand data to warrant additional cuts in policy rates going forward.

Sell-side viewpoints post yesterday's China credit data. HSBC and J.P. Morgan see more policy support coming. J.P. Morgan also sees downside risks to its Q3 China growth forecasts.

HSBC: "More policy support is needed, which we think it will continue to be led by fiscal policy. The government has noted it will accelerate special bond issuance in the rest of the year (see China Politburo Meeting, 30 July). According to data from the Wind, as of the end of July, the issuance of special local government bonds was still less than 50% of the annual quota. July credit showed government bond issuance was elevated, increasing by RMB691bn, though down from May and June levels. Monetary policy should also play a role. While the recent interest rate cuts in July may still need time to filter through, we think there is still space for more monetary easing this year (i.e. 10bp cut for the 7-day reverse repo rate), especially as the US Fed is expected to start to ease soon."

J.P Morgan: "CNY loan component in TSF registered the first monthly decline on record (-77bn yuan), reflecting weak loan demand but also banks’ low incentive to lend under low interest rates, NIM compression and capital adequacy pressure (especially for smaller banks). Non-loan components in TSF were in line with expectations in July, with net government bond issuance at 691bn yuan, net corporate bond issuance at 203bn yuan and net decline in shadow credit of 76bn yuan. Our forecasts look for another 25bp RRR cut in 3Q and 10bp rate cut in 4Q. Changing Fed rate outlook and mitigated CNY depreciation pressure open room for the PBOC to maintain small-step rate cuts in the coming quarters. But overall, monetary policy can hardly be labelled as accommodative given the slow pace of rate cuts and weak credit growth. Despite the policy shift since the July politburo meeting, the magnitude of policy adjustment runs the risk of being insufficient to stabilize the economy, hence the risk to 3Q growth forecast is biased to the downside."

Oil prices unwound some of Monday’s large gains yesterday driven by profit taking and a decline in the geopolitical risk premium from continued uncertainty over Iran’s response to the attack on Hamas in Tehran. The IEA commented in its report that there will be excess supply if OPEC increases output from Q4, which also weighed on the market. OPEC revised down its demand forecasts this month too. The USD index fell 0.4% following softer US PPI data.

• WTI fell 1.8% to $78.66/bbl after an intraday low of $78.16 but has started today higher at $78.81 supported by data showing another drop in US inventories despite weak China credit. Initial support is at $74.60 with the bear trigger at $71.67, while initial resistance is $80.77.
• Brent is down 1.6% to $81/bbl but it held above $80 with a low of $80.55. Monday’s rally highlights a possible short-term reversal. Initial support is at $78.77 and resistance at $82.40.
• Bloomberg reported another large US crude stock drawdown of 5.2mn barrels last week, according to people familiar with the API data. Gasoline fell 3.69mn but distillate rose 612k. The official EIA data is out later today.