Return to Insights

China Slips into Deflationary Territory

China's economy slowing down, windfall tax on banks' profit passed by Italian government, and what's happening to US CPI.

China has reported its first deflationary print since February 2021 as the world’s second-largest economy continues to show signs of slowing down. On an annualised basis, Chinese CPI fell 0.3% in July, as the cost of food fell 1.7% and transport sunk 4.7%. Beijing is maintaining that the deflationary territory will only be temporary as the Chinese economy adapts to tighter monetary policy. Given how sensitive the term is, the central bank shied away from saying that deflation would be ‘transitory’.

Key drivers behind the Chinese deflation include weakened businesses and consumer demand as the economy dips following the initial surge in spending following easing covid restrictions. In the latest signal that the world’s second largest economy may be slowing, analysists are

weighing up whether this data release may act as a further impetus for Beijing to consider implementing a fiscal stimulus package. This comes as the CCP aims to achieve 5% growth this year, a figure which despite being relatively low in comparison with historic rates, will nonetheless be a challenge this year as the country comes out of Covid lockdowns and navigates through a delicate property market.

Elsewhere, as we looked at last month worries over China’s mid to long term economic outlook are growing with many economists considering the impact of country’s debt-ridden municipal governments, high levels of colleague graduate unemployment (currently around 20%), a fragile housing market and demographic pressures.

Taking A Slice

Yesterday, the Italian government passed a windfall tax of 40% on banks’ profits derived from net interest income. The country’s parliament now has two months to pass it into law. The recent rise in interest rates has seen the net interest margin of banks surge as the spread between what they charge borrows and pay savers widens. The latest move from Prime Minister Giorgia Meloni’s comes as the Fratelli d’Italia party vows to reinvest the levy to households and businesses struggling with rising borrowing costs. According to some sources in the government, the levy is expected to generate some €2bn though some commentators at Jefferies and Equita have projected that this figure could be more like €4.5bn.

The announcement generated considerable concern, with the share price of Intesa Sanpaolo and UniCredit, slumping 8.6% and 5.9% respectively, by yesterday’s close. As concern continued to spread, the Italian government then had to clarify that the windfall tax won’t exceed 0.1% of the bank’s assets. The finance ministry said that this was “in order to safeguard lenders’ financial stability”.

Last month banks both sides of the Atlantic indicated that their net interest income continued to rise, with Wells Fargo & Co last issuing guidance for a 10% higher net interest income over 2023. Earlier this year, JPMorgan Chase & Co released guidance that they are now expecting its net interest income to hit around $84bn, an upward revision of $3bn forecast in April.

US CPI in Focus

Today is a little light on the primary data front with markets eagerly awaiting the US CPI print issued at 1330 tomorrow afternoon. Here, the general market consensus is projecting a headline print of 3.3%. Presently, money markets are pricing in around a 12% chance of a 25bps rate hike from the Fed, with many considering whether the CB has reached their terminal rate. Hence, a surprise to the upside of this print could see investors raise their conviction of a future rate hike from the Fed. Hence, all eyes remain on the US ahead of this pivotal inflationary print.


If you would like a PDF of this commentary, please contact us and we'll be in touch.

Contact us


Find out how we have helped our clients meet their hedging requirements.

Monday Rundown

Macro Monday, expectations set on future tax cuts, unwelcome opposition for Labour after Galloways Rochdale by-election win, ceasefire talks stalled, Russians intercept German air force video conference, talk of issues and downgrades of US regional banks, and looking ahead to this weeks data calendar.

WTFX: Issue 10

In this month’s WTFX we look at the Space Renaissance and the extent to which the UK is making inroads into outer space...

Morning Round-Up

Friday Feeling, Labour majority overturned by Workers Party of Britain in Rochdale by-election, PCE index for the US comes in line with expectations, prices rose by more than expected in the Nationwide House Price Index, and growing GDP for Canada.

EC Considers Using Funds from Frozen Russian Assets to Arm Ukraine

Thought for Thursday, president of EC proposes the use of funding from frozen Russian assets to arm Ukraine, disquiet between Poland and Ukraine as Polish prime minister considers closing borders, and this afternoons US data release.

G20 and Michigan Primary in Focus

Word of the week Wednesday, G20 reconvene in Sao Paulo, Democrat and Republican primary elections in Michigan last night, and preparations for the Gaganyaan space mission sees four Air Force pilots shortlisted.

Hungarian National Assembly Approves Sweden’s Nato Bid

Travel Tuesday, motion supported by Hungarian parliament to allow Sweden to join Nato, Trump's legal bill continues to grow interest with US monetary conditions at their tightest level in 22 years, and today's data.

Red Sea Disruption

Macro Monday, report from the BCC on the impact on British businesses from Red Sea disruption, Ukraine president announces number of deaths since the Russian full-scale invasion, and data releases today.

Two Years Later

Friday feeling, what's happened in the last two years of the Russia-Ukraine conflict, and more hawkish views from the Fed.

Find out more about our foreign exchange solutions
Contact us