Strong inflationary readings from China

10 January, 2017

The key event of the Asian session, December’s inflation data from China didn’t disappoint, the CPI y/y came at 2.1% (vs 2.2% expected and 2.3% previously) but producers prices surged by 5.5% y/y  with expectations at 4.6% and prior growth of 3.3%.  Actually factory reflation in China is a positive sign as real borrowing costs are currently negative. Some even point to a need of rate hikes with a rebounding inflation (especially given the need for support for a weaker yuan). 

PPI prices distinctly rose but one should see the overall picture: oil prices were 52% higher (in y/y terms) in December, iron ore prices climbed 98.4%, we also had a weaker yuan, source: Bloomberg

However the impact on the monetary policy will be probably limited. PPI haven’t had much impact on CPI which stays distinctly below 3% target of the PBOC. Economy looks stronger than a year ago and there is an argument of strengthening the yuan but if we are about to see any rate hikes in China, CPI should rise towards the target of 3%. Meanwhile it is likely to continue to edge down in the Q1.

Why? Because of a higher base for comparison (in the Q1 of 2016 soaring food prices drove the index higher). Data hasn’t influenced market to a bigger extend, we see a small drop on Asian Equities and little volatility on the FX market.’

There is also an interesting story about China and US inflation. Chinese PPI has a good history of leading US core PCE inflation by 8-16 months. Current Chinese inflation would suggest that FED may actually be behind the curve.

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