More Monetary Tightening Expected in U.K. and China

by: Steven Towns

Inflation slowed to 2.5% in May in the U.K., the lowest rate in seven months. However, economists seem to agree another rate hike is "locked-in," while a follow-on hike is debatable. In China, consumer prices jumped 3.4%, the fastest clip in more than two years, signaling the PBoC has to do more to slow the economy. Although the Consumer Price Index [CPI] dipped in the U.K., it remains above the Bank of England's 2% target. In addition, core CPI gained 0.1% to 1.9%. "The increase in core inflation is ongoing and that means inflation may go back up. We're still in a hiking environment, and not only in the U.K," said an economist at BNP Paribas (London) in an interview with Bloomberg. Economists had expected an inflation reading of 2.6% and core CPI of 1.8%. September interest-rate futures are currently trading near 6.1%, compared to the current benchmark rate of 5.5%. China's inflation was boosted by a 26.5% jump in meat prices. Also, household deposits fell by approximately $36.4b in May, declining for the second consecutive month, after not having fallen since Feb. 2003. Analysts say inflation, as well as strength in equities -- fueled by what is regarded as speculative shifting of savings to the stock market -- will necessitate more monetary tightening.

Sources: Bloomberg I, II
Commentary: China's Pig Sty Politics: Thoughts On Pork InflationChina's May Surplus Surges 73%, Yuan Falls, Shanghai Retests 4,000U.S. 10-Year Treasury Passes 5%, Futures Dip
Stocks/ETFs to watch: CurrencyShares British Pound Sterling Tr (NYSEARCA:FXB), PowerShares DB G10 Currency Harvest (NYSEARCA:DBV), CurrencyShares Japanese Yen Trust (NYSEARCA:FXY), iShares Lehman TIPS Bond (NYSEARCA:TIP), iShares Lehman 1-3 Year Treasury Bond (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond (NYSEARCA:IEF), iShares Lehman 20+ Year Treas Bond (NYSEARCA:TLT). iMSCI United Kingdom Index Fund (NYSEARCA:EWU), iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), PowerShares Golden Dragon Halter USX China Portfolio (NASDAQ:PGJ), Morgan Stanley China A (NYSE:CAF)

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