China’s CPI inflation lifts as non-food prices increase

Chris Scicluna

Inflation jitters re-emerge, sending breakevens to new highs and equities lower
With key commodity prices surging to new highs, pre-US CPI jitters were very much in evidence on Monday with an increase in inflation breakevens – the 5Y5Y forward breakeven rising to a 7-year high of 2.36% – helping to send US equities lower. Technology stocks were especially under the pump, with the Nasdaq closing with a 2.6% loss. Steep declines in technology, consumer discretionary and communications stocks likewise drove the S&P500 to a 1.0% loss, while cycling back into defensive and value stocks meant that the DJI finished down just 0.1%. With real yields declining, the nominal 10Y UST yield finished just 2bps higher at 1.60%, while the greenback was little changed.

Those jitters have carried into most Asian-Pacific equity markets today, with Japan’s TOPIX slumping 2.4% despite MIC’s household survey reporting a larger-than-expected rebound in consumer spending in March (see more below). Weakness in the technology sector weighed heavily on benchmark bourses in Hong Kong (-1.9%) and especially Taiwan (-3.8%), while South Korea’s KOSPI fell 1.2%. By contrast, in mainland China the CSI300 rose 0.5% after the April CPI inflation printed slightly below market expectations at just 0.9%Y/Y, even as PPI inflation lifted more-than-expected to a more than 3-year high of 6.8%Y/Y (see more below). In other Chinese news, delayed census data revealed that the population had grown to 1.412bn last year, with average annual population growth over the past decade slowing to the least since 1950s but still positive at just over 0.5%.

In Australia, the ASX200 declined 1.1%, driven by a slump in technology and energy stocks. Even so, ACGB yields have nudged higher ahead of the release of the Federal Budget, which will be presented shortly at 7.30pm Sydney time. Given the more rapid-than-expected improvement in the labour market and surging commodity prices, the Government is widely expected to forecast significantly lower fiscal deficits than forecast back in December, notwithstanding the impact of additional policy measures that are likely to be unveiled (measures to address aged- and child-care have already been announced). This will of course have implications for the AOFM’s debt issuance plan – likely to be unveiled first thing tomorrow – and will be a factor that will need to be considered by the RBA’s Board when it considers the future of its QE programme and 3Y yield target at its meeting in July.

Japan’s household spending rebounds in March; down heavily in Q1 but fall likely overstated
This week’s Japanese economic data flow kicked off today with the MIC releasing its monthly survey of household spending and incomes for March. According to the survey, real household spending increased a much greater than expected 7.3%M/M. And so with spending last year being impacted by the onset of the pandemic, annual growth picked up to 6.2%Y/Y – about four times above the market consensus – following a 6.6%Y/Y decline in February. The measure of core spending, which excludes spending on volatile components such as housing and autos, increased 5.6%M/M and 5.7%Y/Y, led by a 16.8%M/M rebound in spending on transport and communication, a further 10.1%M/M rebound in spending on recreation and a 7.8%M/M increase in spending on medical care.

Notwithstanding the pleasant surprise in March, the more than 7%M/M slump in spending that took place in January means that total spending fell 3.9%Q/Q in Q1, with core spending down an even greater 4.3%Q/Q. Fortunately, we expect that tomorrow’s release of the BoJ’s Consumption Activity Index – a much superior indicator of the national accounts measure of private consumption – will likely point to a decline in spending that is only about half as large as suggested by the MIC’s measures. Finally, we note that the survey’s measure of workers’ real disposable incomes fell 0.9%Y/Y in March, compared with the 0.6%Y/Y decline reported in February.

China’s CPI inflation lifts in April as non-food prices increase; PPI inflation up sharply due to surging commodity prices
The focus in China today was on the CPI and PPI reports for April. Beginning with the CPI, annual inflation increased 0.5ppts to a 7-month high of 0.9%Y/Y – 0.1ppts below the consensus expectation. All of that increased owed to base effects associated with last year’s pandemic-induced slump in prices, as the CPI fell 0.3%M/M in April. As was the case last month, the second-consecutive decline in average monthly prices was driven by a 2.4%M/M decline in food prices, with pork down 11%M/M and fresh vegetables down almost 9%M/M. By contrast, non-food prices increased 0.2%M/M for a second consecutive month and so annual non-food inflation increased 0.6ppts to a 15-month high of 1.3%Y/Y, not least due to a 19.4%Y/Y increase in the price of automotive fuels. Excluding both food and energy, the CPI increased 0.3%M/M, causing this measure of core inflation to increase 0.4ppts to a 10-month high of 0.7%Y/Y – still very subdued relative to the PBoC’s target of 3% inflation.

As expected, reflecting surging commodity prices, a much larger uplift in inflation was observed in the PPI indices, which could cause consumer price inflation to firm somewhat later in the year. The overall PPI output index increased 0.9%M/M in April – this following a 1.6%M/M increase in March – lifting annual inflation by a greater than expected 2.4ppts to a more than three-year high of 6.8%Y/Y. This outcome was once again due mostly to higher prices for producer goods, with mining prices lifting 1.8%M/M and 24.9%Y/Y. The price of manufactured producer goods increased 1.3%M/M and 5.4%Y/Y. By contrast, the PPI for consumer goods increased just 0.1%M/M, albeit weighed down by lower food prices. Prices for durable consumer goods increased 0.4%M/M in April – the most since figures were first collected in 2011, and yet prices remained down 0.9%Y/Y. Prices for daily-use items increased 0.3%M/M and 0.3%Y/Y.

ZEW survey likely to report significant optimism about euro area economic outlook
Another relatively quiet day in store for economic data from the euro area, with the German ZEW investor survey for May due along with Italian IP figures for March. The ZEW survey seems highly likely to mirror yesterday’s upbeat Sentix investor sentiment survey results, with the headline euro area index beating expectations with a rise of 7.9pts in May to 21.0, the highest in more than three years. The detail revealed a significant improvement in assessments of current conditions, for which the respective index rose more than 12pts to 6.25, the first positive reading since February 2020 and the best since May 2019. While the improvement in expectations was smaller, the 2pt rise took the respective index to a series high of 36.8. Meanwhile, Italian IP is expected to rise about ½%M/M to be still down around ½%% from the pre-pandemic level in February 2020.

BRC retail monitor unsurprisingly reports big surge in UK sales in April
There were no surprises from the BRC retail sales monitor for April, which was released overnight and reported a surge in sales, particularly after the reopening of non-essential stores in England and Wales from the 12th of the month. Indeed, given the weakness of sales a year earlier during the first wave, growth in total sales leapt to 51.1%Y/Y in April, from 13.9%Y/Y in March. And while the growth rate in sales compared to the same month in 2019 slowed to 7.3% in April, from 8.3% in March, that moderation reflected the timing of Easter. Sales growth was particularly strong in non-food items, particularly clothing, footwear and jewellery, as consumers prepared for the reopening of the hospitality and leisure sector. (Indeed, the government yesterday confirmed that indoor dining and drinking, as well as hotels and most entertainments, would be able to reopen in England from 17 May.) Despite the strong headline numbers, the BRC cautioned that conditions on the UK high street were still far from favourable, with some 530k workers in the sector still reportedly on furlough. And as the hospitality and leisure sector reopens, retailers might well find that consumers increasingly divert their spending from goods back to services.

Business sentiment and labour market data ahead in the US today
Following a data-free Monday, today will see the release of two economic reports in the US, albeit neither likely to have much impact on financial markets. First up is the NFIB small business sentiment survey for April, which will likely benefit from the strengthening recovery and reopening. Second is the JOLTS report for March, which last month reported the largest number of job openings in more than two years. Meanwhile, today’s line-up of Fed speakers includes Governor Brainard and Presidents Williams, Daly, Bostic and Harker.

Aussie consumer confidence nudges lower last week
The ANZ-Roy Morgan consumer confidence index fell a modest 1.0% last week, thus remaining in this year’s narrow range. Respondents were more optimistic about the economic outlook, but curiously less inclined to view the present as a good time to buy a major household item.

Kiwi consumer spending indicator increase strongly in April
As had perhaps been suggested by the recent further improvement in business sentiment, today Statistics New Zealand report a strong 4.0%M/M lift in the value of electronic transactions processed through retail stores during April. To some extent this may have reflected pent-up demand due to short-lived restrictions in place during February and March, with spending 3.7% higher than the average through Q1. As a result, at least a modest pullback in spending would seem likely in May. With many retail stores closed this time last year, annual growth increased to almost 109%Y/Y, with spending at hospitality venues more than 20 times higher than a year earlier and spending on apparel almost 10 times higher. 

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