China’s core CPI inflation weakens in January

Chris Scicluna

Chinese equities rally to new highs after weak CPI report; other Asian markets more subdued after a quiet day on Wall St, but greenback continues to slide
A six-day rally in US equities took a breather on Tuesday, with the S&P500 opening a little lower and eventually closing down 0.1% (although the Nasdaq did eke out a 0.1% gain). Yields were also range-bound in the Treasury market, with the 10Y note closing unchanged just above 1.15%, a level at which it remains at the time of writing. However, the greenback weakened for a third consecutive session, with the euro moving back above 1.21 and the yen consolidating below 105.

Much like yesterday, today the main action in Asia-Pacific equity markets has been in China, where markets have rallied strongly for a third consecutive day. At the close, the CSI300 was up 2.1% and so at a new record high, boosted by yesterday’s late news of stronger-than-expected credit growth – albeit showing further signs of waning momentum – and today’s soft CPI print (more on both below). Markets in mainland China will now remain closed until Thursday next week due to the LNY holiday. In Hong Kong, which will begin a three-day holiday tomorrow, the Hang Seng is up a similarly ebullient 1.7%.

In Japan, which has a one-day holiday tomorrow, the TOPIX increased a far more modest 0.3% with the BoJ’s goods PPI report for January providing no surprises with the pace of decline moderating at the start of the year on higher commodity prices. In local news, with one eye on next month’s BoJ policy review, new Board member Toyoaki Nakamura gave a speech in which he defended the Bank’s past ETF purchases, but seemed less convinced that the current purchase rate was optimal in the current environment. Meanwhile, after declining against the regional trend yesterday, Australia’s ASX200 rebounded 0.5% today while a strengthening Aussie dollar placed modest downward pressure on local bond yields despite news of a pickup in the Westpac consumer confidence index. Kiwi bond yields also retreated after the RBNZ’s Governor told a parliamentary committee that many pandemic-related risks remain and as investors continued to digest measures announced to slow a rampant housing market.

Japan’s goods PPI boosted in January by rising commodity prices
The BoJ’s producer goods price index increased 0.4%M/M in January – a second consecutive increase that slowed the pace of annual deflation by 0.4ppts to 1.6%Y/Y, in line with market expectations. The PPI for manufactured goods increased an even more solid 0.6%M/M, also reducing annual deflation by 0.4ppts to 1.2%Y/Y. The key drivers of this increase were the same as a month earlier – namely, a further 4.7%M/M increase in the price of energy products (which nonetheless remained down 14.7%Y/Y) and a 3.0%M/M increase in the price of non-ferrous metals (now up 12.6%Y/Y). Final good prices were unchanged in the month of January and still down 1.4%Y/Y, while final consumer goods prices decreased 0.1%M/M and were down a steady 1.6%Y/Y. Meanwhile, measured in yen, import prices increased 2.1%M/M in January, causing the pace of annual deflation to slow to 8.2%Y/Y. That annual decline continues to stem mostly from a 26.6%Y/Y decline in energy prices, although prices for chemicals and electronics also fell more than 4%Y/Y. By contrast, metals prices increased almost 8%Y/Y.

In other Japanese news, reflecting the lagged impact of last year’s economic contraction and decline in corporate profits, the office vacancy rate in the Tokyo business area increased a further 0.33ppts to 4.82% in January. The vacancy rate has now more than tripled from the pre-pandemic low to the highest level since July 2015. Unfortunately, while the vacancy rate remains a little below its long-term average, this will likely not be the case by the end of the quarter. Not surprisingly, the rising vacancy rate is weighing on office rental rates, which for buildings more than a year old fell for a sixth consecutive month in January.

China’s core CPI inflation weakens in January, but producer price inflation firms; more signs of restraint in the latest credit data
Ahead of the Lunar New Year holiday, which begins tomorrow, the focus in China today was on the CPI and PPI reports for January. While the CPI increased 1.0%M/M, this year’s pre-LNY holiday increases were smaller than last year – indeed by a greater factor than markets had anticipated – and so annual inflation fell 0.5ppts to a lower-than-expected -0.3%Y/Y. Importantly, the decline in annual inflation occurred despite a sharp increase in the price of food. With fresh vegetable prices surging 19%M/M and pork prices rising 5.6%M/M, overall food prices increased 4.1%M/M and so caused annual food inflation to increase to 0.4ppts to 1.6%Y/Y. By contrast, non-food prices increased just 0.3%M/M and so annual non-food inflation slumped 0.8ppts to a post-GFC low of -0.8%Y/Y. Meanwhile, excluding both food and energy, the CPI increased just 0.1%M/M, causing this measure of core inflation to slump 0.7ppts to -0.3%Y/Y – the first negative reading since November 2009. Of particular note was an 8.6%Y/Y decline in travel prices, doubtless reflecting relatively weak demand for travel ahead of the LNY holiday. Meanwhile, the annual inflation rate for household services fell to just 0.9%Y/Y – the least since 2003.

As expected, a more positive inflation was observed in the PPI indices, suggesting that consumer price inflation may begin to firm somewhat later in the year. The PPI output index increased 1.0%M/M in January – this following a 1.1%M/M increase in December – lifting annual inflation by 0.7ppts to 0.3%Y/Y. This outcome, which was in line with market expectations, was once again due mostly to higher prices for producer goods, especially for mining and other raw materials. That said, the price of manufactured producer goods increased 0.7%M/M and 1.0%Y/Y. By contrast, the PPI for consumer goods increased just 0.2%M/M, and this was largely due to higher food prices. Prices for durable consumer goods fell a further 0.1%M/M in January and were down 1.8%Y/Y, whereas prices for daily-use items were reported to have increased 0.1%M/M and yet were unchanged from a year earlier. Needless to say, while the PBoC is clearly concerned about excessive credit growth, it is likely to be some time before concerns about too high CPI inflation motivate the need to tighten momentary policy.

In other news, late yesterday the PBoC released the money and credit aggregates for January, which after accounting for seasonal strength continued to suggest a degree of quantitative policy tightening. As usual, loans were rushed out of the door at the beginning of the year with aggregate financing increasing CNY5.17trn, up from CNY1.72trn a month earlier. While this was CNY570bn above the consensus expectation in Bloomberg’s survey, credit creation in January was only slightly stronger than in the same month last year. As a result, the outstanding stock of aggregate social financing grew at a slower pace of 13.0%Y/Y – down 0.3ppts from December and the third consecutive month of slower momentum since growth peaked back in October. Meanwhile, growth in M2 also declined 0.7pts to 9.4%Y/Y – the slowest pace for 11 months.

French IP drops by more than expected in December on refinery closures
Unlike Germany, where factory output rose for an eighth successive month in December, French manufacturing production dropped at the end of last year and by a steeper-than-expected 1.7%M/M to be down 5.7% from last February’s pre-pandemic level. Nevertheless, over the fourth quarter as a whole French production rose 2.4%Q/Q. The drop came despite an increase in the transport goods sector, where production rose 2.2%M/M albeit still down 10.0% from last February. Within that category, autos output rose 1.4%M/M to be down 3.1% from February. Other main categories, however, saw output drop at the end of last year, with production of coke and petrol down by almost one third due to the shutdown of several refineries. While that category should rebound over the near term, surveys point to limited further growth in total factory output in Q1. Meanwhile, construction output fell a steep 8.7%M/M in December to be down 10.9% from last February and down 2.9%Q/Q in Q4.

Record jump in German inflation in January confirmed
Elsewhere, the record jump in German inflation in January was confirmed in this morning’s final estimates. In particular, on the EU HICP measure, inflation jumped a whopping 2.3ppts to an eleven-month high of 1.6%Y/Y while the national measure rose 1.3ppts to 1.0%Y/Y and the core measure on that basis rose 1ppt to 1.4%Y/Y. The main driver of the rise was the reversal of last summer’s temporary VAT cut as well as higher energy prices, in part due to Germany’s new carbon charge, with changes in basket weights explaining the steeper rise on the HICP measure.

January CPI report the focus in the US today, but speech by Fed’s Powell of interest too
Inflation will also be the focus in the US today with the January CPI report the main highlight of today’s diary. Daiwa America Chief Economist Mike Moran expects that higher energy prices will help drive the headline CPI to a 0.2%M/M advance, which should leave annual inflation unchanged at 1.4%Y/Y. However, he expects the subpar economy to have weighed on general prices, and so has pencilled in a mere 0.1%M/M lift in the core index – an outcome that would lower annual core inflation from last month’s 1.6%Y/Y given that the index had increased 0.2%M/M last January. Today will also see the release of final wholesale trade data for December and Federal Budget data for January, with Mike expecting the latter to reveal a deficit of $150bn compared with just $32bn a year earlier. Aside from the data, a speech by Fed Chair Powell to the Economic Club of New York on the state of the labour market will also be followed closely, especially in light of the somewhat contradictory employment and unemployment news provided by last week’s January jobs report.

Australia’s Westpac consumer confidence index strengthens in February
After starting the year on a slightly softer note, the Westpac consumer confidence index rebounded 1.9%M/M in February to 109.1 – aside from last December’s reading, the highest level recorded for more than seven years. The improvement this month was dominated by a 6.9%M/M lift in the index measuring year-ahead expectations for the economy, which had also played a lead role in driving the decline in the overall index in January. Respondents were also more optimistic about the year-ahead outlook for their personal finances, with that particular index rising to the highest level since September 2013.

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