Another Month of Weak Chinese Inflation Data in June, Five Months of Monthly Deflation
Economic news and commentary for July 10, 2023
China CPI & PPI
In June, China's consumer price index (CPI) experienced a month-on-month (MoM) decline of -0.2%, remaining unchanged compared to the previous month's year-on-year (YoY) figure of 0.2%. This underwhelming performance in inflation marks another month of disappointing data for the Chinese economy.
One significant factor contributing to the subdued inflation figures is food prices. Food inflation, which has historically exerted upward pressure on prices, experienced a MoM decline of -0.5%. As a result, YoY food inflation now stands at a modest 2.3%. A reversal in food price trends would remove a crucial support for headline CPI. Energy prices, with gas prices as a proxy, have also been a significant deflationary force, showing a MoM decrease of -1.3% and a significant YoY decline of -17.6%. These deflationary trends in energy prices further contribute to the overall weakness in inflation.
The weak core inflation figures underscore the sluggishness in consumer activity. Goods prices, reflecting weak consumption across various product categories, recorded a MoM decline of -0.3% and a YoY decrease of -0.5%. This indicates a lack of demand for a wide range of goods. On a more positive note, services prices did experience a modest MoM increase of 0.1%. This uptick suggests some activity within the Chinese consumer economy. However, the YoY increase in services prices remained subdued at only 0.4%. This suggests that the post-pandemic recovery in China has been relatively lackluster.
Turning to China's producer price index (PPI), both input and output prices displayed significant declines. In June, input PPI fell by -1.1% MoM and -6.5% YoY, while output PPI experienced a MoM decrease of -0.8% and a YoY decline of -5.4%. These figures, falling below forecasts, indicate a collapse in both domestic and international demand. Several key industries are facing strong deflationary pressures, particularly in the ferrous metal materials sector. The PPI for ferrous metal materials reported a substantial YoY decrease of -11.2%, while output prices within the industry experienced a significant YoY decline of -13.9%.
Taken together, these inflation and PPI figures reflect the challenging economic conditions in China. Weak inflation across various sectors, particularly in goods prices, highlights sluggish consumer demand. The deflationary pressures observed in energy prices and key industries further underscore the overall decline in both domestic and global demand. These indicators suggest that the post-pandemic recovery in China has been modest at best, warranting close attention to future economic developments. Base effects will keep GDP reports from being disastrous this year.
Still to come…
10:00 am (EST) - US Wholesale Inventories
12:30 pm - US Investor Movement Index
3:00 pm - US Consumer Credit
8:30 pm - Australia Westpac Index of Consumer Sentiment
9:30 pm - Australian NAB Business Survey
Morning Reading List
US Employment
US jobs show signs of slowdown, but it won’t deter the Fed (ING) - A softer jobs report than widely expected has taken some of the steam out of recent market moves, but the labour market remains too tight for the Fed to relax. A July rate hike is coming, but labour data is the most lagging of indicators and softer inflation next week could see rate hike expectations for further out moderate a touch.
US Hiring slows, but not by enough to satisfy the Fed (CIBC) - Hiring cooled in the US in June, with 209K jobs being added, relative to the consensus of 230K, and a 110K negative revision to the prior two-month job tally compounded that slight downside miss. The rest of the report indicated a still tight labor market, as the unemployment rate ticked down to 3.6% as expected, reflecting a 273K gain in jobs on the household survey, while average wages rose by a strong 0.4% m/m, a tick above expectations, and the prior month's pace was revised up to 0.4% from 0.3%.
U.S. Payrolls: Cracks Forming? (BMO) - The labour market appears to be cooling but not fast enough to prevent another tap on the brakes from the Fed on July 26.
Nonfarm Payrolls Increased 209,000 in June (First Trust Portfolios) - A hint of tepidness in the June labor market, but only a hint. Nonfarm payrolls rose 209,000 in June, a little below consensus expectations. Payrolls were also revised down 110,000 in prior months and, including those revisions, the net gain was 99,000, still upward but well slower than the recent pace of payroll gains. We think this is
an early sign that the reduction in the M2 measure of money that began last year is starting to gain traction in slowing the economy.
June Employment: Cooling, Still Hot (Well Fargo) - Nonfarm payrolls increased by 209K in June, coming in modestly below the Bloomberg consensus for the first time in 15 months. Downward revisions to job growth in the two previous months showed that employment growth has not been quite as strong as previously believed. Government hiring was once again robust (+60K), but the 149K increase in private sector employment was the smallest gain since 2020. The unemployment rate held steady at 3.6% and is unchanged from where it was in March 2022 when the FOMC hiked rates for the first time.
Canada Employment
Canadian employment (June): A mixed bag (CIBC) - This morning's data release was no slam dunk for the Bank of Canada, with a rise in the unemployment rate and slowing wage growth suggesting that labour market conditions are loosening. However, the data are probably just strong enough to see policymakers pull the trigger on another 25bp interest rate hike next week, rather than wait until September as we had previously forecast.
Canadian Employment (June) — Strong Jobs Point to Another BoC Rate Hike (BMO) - This is a solid report overall even if it has some blemishes. The big headline increase and ongoing strength in the labour market likely tilts the balance toward another 25 bp hike at next week's Bank of Canada policy announcement.
US
How Mergers in the Farm Credit System Have Affected Ag Banks (Kansas City Fed) - Commercial banks and the Farm Credit System (FCS) have been the most important sources of agricultural loans in the United States in recent decades. Since the 1990s, however, mergers and acquisitions have increasingly concentrated both FCS and commercial banks, raising concerns about potential effects on the agricultural credit market. Economic theory suggests that the merger of two or more competitors can change banks’ portfolio choices and use of resources, potentially changing the prices and availability of agricultural credit.
U.S. Resilience: Et Tu, Uncle Sam? (BMO) - Another week of sturdy reports solidified the U.S. economy’s reputation for resilience. From rising employment, to rebounding services activity and accelerating auto sales, there’s little sign that the economy is rolling over. We have long talked about the key pillars propping up demand—excess savings, revenge spending, labour hoarding—but flying under the radar is another buttress—fiscal policy.
Light Still Green for the Fed to Hike Despite Soft Jobs Report (Wells Fargo) - June hiring data came in short of expectations and signal the recent trend in hiring is clearly lower. But continued economic resilience and generally robust incoming data still give the Fed the green light to resume monetary policy tightening on July 26.
Research US - Rising real rates cast a shadow over upbeat macro data (Danske Bank) - The persistent strength of the US economy's service sector combined with steady labour market and too fast wage inflation call for one more Fed hike in July. As inflation expectations decline, real rates have risen above levels prevailing before SVB's collapse - increasing the risk of a hard landing down the line.
Why Immigration Is an Urban Phenomenon (San Francisco Fed) - Immigration is fundamentally an urban phenomenon. Both in the United States and elsewhere, immigrants settle primarily in cities—especially high-wage, high cost-of-living cities. The most likely reason is that immigrants often send a significant share of their income back to their origin country. As a result, they value a city’s high wages and are less discouraged by the high living costs than native-born workers. Migration policies can reinforce this urban concentration pattern.
What's Next for Student Debt? (Northern Trust) - Last week, the Supreme Court blocked the Biden Administration’s program of student debt relief. We are not legal scholars, and cannot comment on the merits of the case. We can say that it will have an important economic impact.
How Child Care Impacts Parents’ Labor Force Participation (St Louis Fed) - As of February 2023, the number of child care workers in the U.S. was about 6% below its pre-pandemic level while the cost of child care was up by 14%.1 The shortage of child care workers and rising child care prices have been deemed partly responsible for the lackluster rebound of labor force participation (LFP) rates. Consistent with this hypothesis, a larger share of nonworking parents of young children and those working only part time currently report child care needs as the main reason for their low work hours. This fraction increased from about 15% prior to the pandemic to 18% in February 2023.
Rebuilding Housing (Northern Trust) - Last year, tremors in the residential real estate sector added to fears of an imminent recession. During the pandemic, working and schooling from home accelerated decisions to purchase property. Demand for houses surged faster than supply could respond. But spiking prices and rising interest rates caused the market to cool rapidly.
Europe
The Bank of England will hike until something breaks, and even then, it might not be able to pivot (Saxo Bank) - Market expectations of a 150 basis points BOE rate hike are not as aggressive as they seem. The real BOE base rate should be positive to tighten the economy, but it is in deeply negative territory. By hiking rates by 150bps, the BOE will only be able to bring the real rate into positive territory if price pressures decrease gradually. That means that the central bank might need to be even more aggressive than forecasted by traders if inflation remains elevated. Thus, we continue to stay cautious, favoring short-duration high-quality bonds.
Eurozone goods consumption weak despite rise in real wages (ABN AMRO) - The volume of eurozone retail sales stabilised in May and April. It seems that goods consumption is likely to have contracted again in Q2 after it fell by 0.5% qoq in Q1. Meanwhile, real wages per employee increased in Q1 after plummeting non-stop during the five preceding quarters, and employment expanded as well in Q1. The discrepancy between households’ real income growth and private consumption indicates that savings by households increased.
Swedish May GDP: Stagnation (Nordea) - GDP, production in the business sector as well as household consumption were roughly unchanged in May.
Dutch manufacturing outlook: Struggling with weak demand (ING) - With supply constraints diminishing, declining demand is limiting industrial activity in the Netherlands. The picture differs strongly between industries. The large growth gap between energy-intensive and technological industries will narrow now that energy prices are sharply lower and demand has softened across the board.
China
China: The New Way Forward (BMO) - With tech development and macro-financial stability now the key policy priorities, we can confidently conclude that China’s prior “growth at all costs” model has been scrapped. Thus, China is unlikely to power global growth to the same extent as in the past. But it’s important to point out that headline real GDP growth should still post a decent statistical rebound, hitting 5%-to-6% this year (vs. 3.0% in 2022), which cannot be considered a disaster.
Canada
Bank of Canada likely to hike again to ensure inflation returns sustainably to target (ING) - Persistent inflation and resilient demand led the BoC to restart rate hikes in June after a five-month pause. The bar to justifying renewed policy tightening was always high and it seems unlikely that the BoC will revert to pausing again just yet. Some CAD strength could emerge, although primarily against other procyclical currencies.
Bank of Canada Rate Hike? Definitely Maybe (BMO) - It’s another close call for the Bank of Canada, but there’s enough momentum in the economy and labour market to tilt the scales toward another 25 bp hike at next week’s policy meeting.
Tipping the scales (CIBC) - Following last month’s 25bp rate hike from the Bank of Canada, most forecasters instantly predicted a follow up move at next week’s July meeting. After all, why would the Bank break its prolonged pause to hike just once?
Emerging Markets
Emerging Market Central Banks Are About to Get Active (Wells Fargo) - We believe emerging market central banks are on the cusp of initiating, or in select cases continuing, monetary easing cycles. Our Mid-Year 2023 Outlook publication highlighted this view; however, our updated monetary policy space framework reinforces this outlook and confirms that many emerging economy central banks have space to cut interest rates before the end of this year. With that said, we believe financial markets are priced for too much easing.
PMI
Sector PMI finds hints of service sector inflation cooling amid waning demand from consumers (S&P Global) - Detailed S&P Global sector PMI survey data have shown resilient worldwide economic growth in early 2023 to have been fuelled by resurgent demand for consumer services amid a post-pandemic shift in spending away from goods towards activities such as travel, recreation and tourism. Along with rising demand for financial services amid higher interest rates and recent market gains, this demand surge has led to sticky global inflation, offsetting a marked cooling in goods price inflation.
Inflation
The first half of 2023 ends with another week of falling prices (S&P Global) - The Materials Price Index (MPI) by S&P Global Market Intelligence resumed its decline last week, falling 2% after the previous week's pause. The decline was broad with nine of the ten subcomponents falling. Rounding out this half of the year, the MPI declined 19 of the past 26 weeks and now sits 20% lower than it was at the end of 2022.
A (Bayesian) Update on Inflation and Inflation Persistence (Federal Reserve) - Earlier research noted how a Bayesian decisionmaker would update their assessment of inflation dynamics using pre- and post-1999 data. Even with a very low weight on their prior (pre-1999) information, such a decisionmaker would have viewed inflation as persistent in 2021. This finding implied that the elevated inflation of 2021 may continue into 2022. A key element of a Bayesian decisionmaker is to re-evaluate as new data arrives. This note considers experience in 2022 and forecasts for 2023-25.
Emerging Disinflation (Northern Trust) - Responding to the pandemic, governments pursued extraordinary fiscal and monetary policies. Such measures created supply and demand imbalances, driving consumer prices higher. The war in Ukraine further aggravated the inflation shock. More restrictive economic policy has helped to drive inflation down from uncomfortable peaks. However, the process is taking longer than expected, especially in advanced economies (AEs).
Markets
Earnings Watch: Will US banks beat negative expectations? (Saxo Bank) - US banks are going into the Q2 earnings season with very low expectations as earnings estimates have not meaningfully recovered since the US regional banking crisis back in March. Wells Fargo, JPMorgan Chase, and Citigroup are all reporting earnings next Friday and the question is whether they can beat estimates. Our view is that the market has gotten too negative on banking stocks and that strong net interest income will surprise investors offsetting the weakness in capital markets.
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