China's trade disappoints, while consumer price inflation stays subdued

Emily Nicol

Chinese equities firmer today, but other Asia-Pac markets reasonably quiet with Japan on holiday
News of a stronger than expected 943k lift in non-farm payrolls in July – with growth in June also revised higher – and a much larger than expected decline in the unemployment rate to 5.4% lifted both Wall Street and Treasury yields together on Friday. At the close, the S&P500 had advanced 0.2% to end the week at a fresh record high, even as the 10Y note sold off 8bps from the previous day to close at just under 1.30% – the highest yield since mid-July. The lift in Treasury yields also gave a boost to the greenback, which made gains against its major counterparts, but weighed on commodity prices.

For the most part markets have reopened relatively quietly in Asia today, not least due to a holiday in Japan. US equity futures are a couple of tenths weaker, even after a bipartisan infrastructure package cleared procedure hurdles in the Senate late on Sunday, while precious metals have extended Friday’s decline, albeit paring their opening losses somewhat. While most bourses in the Asia-Pacific region are steady today, Chinese markets have recorded solid gains. Indeed, the CSI300 is currently up a little more than 1% following the weekend’s Chinese trade data – in which exports met consensus expectations – and today’s still-subdued Chinese CPI report (more on these below). Given the sell-off in USTs, bond yields are a little higher across the region. However, AGCB’s have slightly outperformed with the 10Y bond yield up just 3bps to 1.22%.

In virus news, new infections in Tokyo remained above 4,000 for a fifth consecutive day on Sunday and the Asahi newspaper reported that PM Suga’s approval rating hit a new low of just 28% in its latest poll, with 66% of respondents disapproving of the government’s handling of the pandemic. Meanwhile, in Australia – where PM Morrison’s approval rating is also dropping – New South Wales reported a further 283 new virus cases (still very high by local standards), while the snap lockdown has been maintained in Melbourne even as a decision was made to ease restrictions elsewhere in Victoria.

Japan on holiday today with a light calendar ahead over the remainder of this week
Japanese markets were closed today in observance of the Mountain Day holiday and the remainder of this week’s economic diary is unlikely to be a key driver when markets reopen tomorrow. Perhaps most interest will centre on tomorrow’s updated Economy Watcher’s survey, with analysts expecting some setback from the improved June reading in light of the subsequent lift in virus cases and re-imposition of emergency conditions in Tokyo and a number of other prefectures. Tomorrow, the BoJ will also release bank lending data for July, while corporate bankruptcy data for July and current account data for June will also be published. The BoJ will follow with the release of broad money data for July on Wednesday and the goods PPI for June on Thursday, thus bringing to an early close this week’s local dataflow.

China’s trade surplus widens in July; export and import growth slows from inflated levels
Over the weekend, China released data on its international trading performance during July. In dollar terms, exports grew 19.3%Y/Y, down from 32.2%Y/Y in June but just a smidgen below the consensus expectation (given a stronger yuan, exports grew a slower 8.1%Y/Y in local currency terms). The slowdown in growth mostly reflects the easing of base effects associated with the first wave of the pandemic, which weighed especially heavily on China’s exports in the first half of last year. Perhaps more meaningfully, exports in July were a sizeable 27.5% higher than in July 2019. By destination, exports to the US increased 13.4%Y/Y in July, down from 17.8%Y/Y in June and marking the slowest pace since July last year. Exports to the EU grew 17.2%Y/Y, also down from 27.2%Y/Y in June. Growth in exports to ASEAN countries likewise slowed to 14.5%Y/Y, while growth in exports to Japan slowed to 12.6%Y/Y.

Growth in imports also slowed in July, with the 28.1%Y/Y outcome down from 36.7%Y/Y in June and about 5ppts weaker than the consensus expectation. However, as with exports, the level of imports in July was around 27% higher than in July 2019. Robust growth rates continued to owe in large part to the rebound in commodity prices, with imports of crude oil up almost 52%Y/Y and imports of iron ore up almost 64%Y/Y. By country of origin, imports from the US grew 25.6%Y/Y, but this was nonetheless the slowest pace since September last year. As a result, coming off a smaller base than that for exports, China’s bilateral surplus with the US widened to an eight-month high of $35.4bn – a result that will undoubtedly not impress the Biden administration. China’s overall surplus thus widened to $56.5bn from $51.5bn in June. China’s imports from the EU increased 19.8%Y/Y. Imports from ASEAN nations grew a somewhat firmer 27.7%Y/Y while imports from Japan grew a notably slower 12.8%Y/Y. Meanwhile, despite the fractious political relationship, imports from Australia grew 41.2%Y/Y – a reflection of the aforementioned commodity price gains – resulting in a bilateral deficit with Australia of $25.6bn.

China’s CPI inflation eases to 1.0%Y/Y in July, but PPI inflation picks up to 9.0%Y/Y
Turning to today’s data, China released both the PPI and CPI reports for July. Beginning with producer prices, the overall PPI output index increased 0.5%M/M. With prices having increased just 0.3%M/M a year earlier, this meant that annual inflation unexpected lifted 0.2ppt to 9.0%Y/Y and so returned to the cyclical high reached in May. Much of that lift was due to a further 5.2%M/M lift in the mining sector and a 0.8%M/M lift in the price of other raw materials. The price of manufactured producer goods increased just 0.1%M/M, although annual inflation still nudged up to 7.5%Y/Y. Meanwhile, there was again little evidence of rising input prices affecting factory gate prices for the consumer. Indeed, the PPI for consumer goods increased just 0.1%M/M and so remained up a very muted 0.3%Y/Y. Prices for durable consumer goods increased 0.2%M/M in July but were still down 0.3%Y/Y.

The subdued inflation in consumer goods prices at the PPI level was also again evident in the CPI. The headline index did increase a larger-than-expected 0.3%M/M in July following a food-driven 0.4%M/M decline in June, but annual inflation still eased 0.1ppt to 1.0%Y/Y – 0.2ppt above the consensus expectation. Food prices fell a further 0.4%M/M to be down 3.7%Y/Y, led by lower prices for pork and fresh fruit. By contrast, non-food prices increased 0.5%M/M – the largest increase since January last year – lifting annual non-food inflation by 0.4ppt to a 28-month high of 2.1%Y/Y. However, this partly reflects higher energy prices, with automotive fuel prices increasing by a further 3.4%M/M in July and so up almost 25%Y/Y. The core CPI, which excludes both food and energy, increased 0.3%M/M – the first negative reading since October – raising annual inflation by 0.4ppt to a still very low 1.3%Y/Y, and so still well below the PBoC’s target of 3% annual inflation.

Looking ahead, the remainder of this week’s Chinese economic diary is empty aside from the July money and credit aggregates, which will likely make an appearance around the middle of the week.

German exports outpace imports in June; euro area IP set to have moved broadly sideways in June
The euro area’s data calendar got underway with this morning’s Germany’s June trade figures. Contrasting with the ongoing weakness in manufacturing output, these reported ongoing recovery at the end of Q2, with growth of 1.3%M/M in June taking them back above the pre-pandemic level for the first time (1.1% higher than February 2020). Given the weakness in June last year, the value of exports was up 23.6%Y/Y, although they were also just above the level in June 2019 too. And over the second quarter as a whole, exports were more than 2% higher than in Q1. But while imports rose a more modest 0.6%M/M in June, they were still more than 10% higher than the pre-pandemic level and up almost 7%Q/Q in Q2. So, while it remains to be seen to what extent price effects played a role, today’s release suggests that net trade remained a drag on growth in Q2. The euro area’s trade figures will be published on Friday. Meanwhile, the euro area Sentix investor confidence survey for August is also due later this morning, with the German ZEW and French BoF surveys due in the first half of the week too.

Arguably of most interest this week will be Thursday’s release of euro area industrial production figures for June. Given the mixed findings from the largest four member states – with German and Spanish output weaker and French and Italian output stronger – we might well see aggregate output move sideways at the end of Q2, following a fall of 1%M/M in May. It will be particularly interesting to see how production in the autos sector evolved having declined a cumulative 28% since last November.

The second half of the week will also bring updated July inflation estimates from the four largest members states – German and Italy figures on Wednesday and French and Spanish data on Friday. These are likely to confirm a further notable jump in the German HICP rate, by about 1.0ppt to above 3.0%Y/Y, underpinned by base effects associated with last year’s VAT cut and energy inflation. In contrast, the equivalent French and Italian figures are expected to confirm a modest easing in July, by 0.3ppt to 1.6%Y/Y and 0.4ppt to 0.9%Y/Y respectively, due in part to base effects from delayed summer sales.

UK Q2 GDP expected to report strong rebound
The main event in the UK this week will be Thursday’s release of the preliminary estimate of UK GDP in Q2, including the expenditure breakdown, as well as production and trade figures for June. We currently forecast a second successive month of growth in GDP in June (circa 0.7%M/M) to leave total economic output up 4.7%Q/Q in Q2 as a whole following a drop of 1.6%Q/Q in Q1. The risks to that forecast, however, are perhaps skewed to the upside. With pandemic restrictions having been eased steadily over the second quarter as a whole, growth in Q2 is likely to have been accounted for primarily by private consumption, which dropped 4.6%Q/Q in Q1. In addition, business investment seems bound to have rebounded after the steep drop of 10.7%Q/Q previously. Within the detail in June, however, we expect supply bottlenecks to weigh on manufacturing production with services activity also at risk of a temporary retreat following firm growth over the prior three months. Construction output, however, is due a rebound following two months of declines. Beyond the GDP and associated data, the latest BRC retail sales survey, which will provide a guide to spending on the high street in July, is due tomorrow.

Job vacancies data ahead in the US today, after which attention will turn to Wednesday’s July CPI report; PPI and preliminary University of Michigan consumer survey follow later in the week
The focus in the US today will remain on the labour market, with the JOLTS report likely to continue to point to a huge number of job vacancies in June despite the substantial job growth recorded during that month. The NFIB small business optimism index for July will follow tomorrow, together with the preliminary readings on labour productivity and unit labour costs for Q2. With output growing at an even faster pace than hours worked, Daiwa America’s Mike Moran estimates a robust 3.0%AR increase in labour productivity, so that unit labour costs likely fell slightly during the quarter. Wednesday brings this week’s key report – the CPI for July. Here, Mike expects another solid 0.4%M/M lift in core prices, so that annual core inflation will probably only ease slightly from the 4.5%Y/Y pace in June. Higher prices for energy and food will likely lead to a 0.5%M/M lift in the headline index, so that annual headline eases just a notch to 5.3%Y/Y. The PPI report for July will follow on Thursday, with Mike also looking for 0.5%M/M and 0.4%M/M increases for the headline and core indexes respectively. On Friday, most attention will centre on the preliminary findings of the University of Michigan’s consumer sentiment survey for August, with further gains in the stock market perhaps enough to have lifted sentiment a little despite worries about rising energy prices and inflation more generally. Aside from the data, this week’s diary also features a relatively light Fed speaking diary, although a speech by the Cleveland Fed’s Mester on inflation risks will likely gain some attention. Meanwhile, the earnings diary slows appreciably this week with just 14 S&P500 companies scheduled to share their results. 

Sentiment indicators the focus in Australia this week, with lockdowns surely to weigh
There were no economic reports of note released in Australia today and the remainer of this week’s economic diary is also light with most focus likely to be on the latest NAB business survey tomorrow, followed a day later by the Westpac survey of consumer confidence. Both surveys were impacted last month by the early days of the Sydney lockdown, and with that lockdown being extended and followed by shorter lockdowns elsewhere it would be surprising were confidence not to have taken a further hit in these surveys (especially business sentiment, which was still very robust last month).

Data on consumer spending, the housing market, inflation expectations and manufacturing PMI ahead in New Zealand this week
It has also been a quiet start to the week in New Zealand, with tomorrow’s Electronic Card Transactions survey – a key indicator of retail activity – the first report of note this week. Later in the week, there will be some interest in the inflation expectations measures in Thursday’s RBNZ Survey of Expectations for Q3, while the manufacturing PMI for July will follow on Friday. The REINZ housing report for July is also likely to make an appearance later this week.

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