China: Economic activity apart from exports likely to show some strength
China’s August data flow begins with trade data over the weekend. Judging by the PMI new export orders component, which was below 50 for the third straight month in August, some weakness in actual shipments looks to be in order. However, Korea’s trade data for August shows that Asian exports have so far been resilient to the trade war. Although China is on the frontline in the trade war, the impact of the first $50 billion of tariffs is expected to be small. Our forecast of 7% year-on-year August export growth implies only a negligible month-on-month fall.
The other Chinese data – inflation, retail sales, fixed asset investment, industrial production, and money and bank lending – will be closely monitored for evidence of domestic policy stimulus kicking in to offset the trade drag. A higher manufacturing PMI in August is a hopeful sign of this, and it also supports our view of slightly better industrial production growth of 6.2% YoY compared to 6.0% in July.
India: Inflation genie in the bottle, but not for too long
We expect India's consumer price inflation in August to be steady at July’s 4.2% level. The favourable base-year effects in food and transport components have kept a lid on CPI inflation for now. But we can't relax just yet. A meteorological prediction of sub-normal rainfall this monsoon season raises the spectre of higher food inflation. This comes amid an administrative hike in minimum support prices for farm products. And with a steadily depreciating rupee boosting imported inflation, mainly through a surging oil import bill, it won’t be long before inflation rears its head. We aren’t ruling out a more aggressive RBI policy move at the next meeting in early October.
Also look out for India’s trade data for August and the balance of payments data for 1Q FY19 (April-June 2018). We expect the continuous widening of the current account deficit as a tailwind for a higher USD/INR rate, which we see grinding towards the 74-75 area over the next six months.