China's CPI Declines for Fourth Consecutive Month, Reflecting Weak Economic Activity
Economic news and commentary for June 9, 2023
China CPI & PPI
China's Consumer Price Index (CPI) continued its downward trend in May, marking the fourth consecutive month of monthly declines. While the year-on-year (YoY) CPI showed a slight increase of 0.2% YoY, it remains higher than the previous month's 0.1% YoY growth. The weakness in prices observed mirrors the challenging period during the peak of COVID-19 restrictions. All major segments experienced declines, with food prices and fuel prices notably affected. As demand struggles persist, goods prices have faced deflationary pressures, while services prices remain relatively resilient. Weak CPI figures are likely attributed to the impact of weak producer prices, reflecting challenges in both domestic and international demand.
China's food CPI, which was previously a strong segment, experienced a monthly decline of -0.2% MoM, resulting in a yearly pace of only 0.5% YoY. Fuel prices also continued their downward trajectory, falling by -0.2% MoM on a monthly basis, with an annual pace remaining at a significant -11.1% YoY. Core CPI, which excludes energy prices, exhibited relatively stronger performance. However, goods prices recorded deflationary pressures, declining by -0.2% MoM and -0.3% YoY. On the other hand, services prices remained a bit stronger in terms of yearly growth (0.9% YoY), fueled by a strong desire for face-to-face activities following the reopening of the economy. However, on a monthly basis, services prices declined by -0.1% MoM suggesting some early signs of weaknesses there.
The weakness observed in China's CPI can likely be attributed to weak producer prices. Output Producer Price Index (PPI) fell by -0.9% MoM and -4.6% YoY in May, compared to -3.6% YoY in April. Input PPI also declined by -1.1% MoM and -5.3% YoY. Commodities prices experienced sharp declines, with the raw material subindex down by -7.7% YoY and the mining subindex down by -11.5% YoY. Producers in the chemical and ferrous metal sectors faced significant challenges, with prices falling by -10.6% YoY and -11.1% YoY, respectively, driven by weakened domestic and international demand. Manufacturing producer prices performed slightly better, but still declined by -5.9% YoY. Producers of non-durable (0.3% YoY) and durable (-1.1% YoY) consumer goods firms look to be trying to benefit from cheaper input pricing by improving their margins.
The persistently weak CPI figures indicate that China's economy is unlikely to achieve its growth targets for this year. The decline in prices across various sectors reflects subdued economic activity, signaling challenges for both domestic and international demand. Deflationary pressures have been a surprise on the downside, as the impact of weak demand abroad may have been underestimated. This doesn’t bode well for global and regional Asian growth either as China is typically a huge engine driving other economies forward.
Still to come…
10:00 am (EST) - US Quarterly Services Survey
Morning Reading List
Other Data Releases Today
Italy's industrial production fell -1.9% MoM in April and was down -7.2% YoY.
Manufacturing production fell -6.7% YoY, and mining & quarrying production fell -9.7% YoY.
The German truck toll mileage index grew 1.6% MoM in May but was down -1.2% YoY.
Canada's employment was little changed in May as a decline in youth employment (down -77,000) offset an increase in 25-54-year-old employment (up 63,000). The unemployment rate increased 0.2 ppts to 5.2%, the first increase since August 2022. Average hourly wages increased 5.1% YoY as wage pressures remain sticky.
Italy Industrial Production
Italy’s industrial production decline worsens in April (ING) - This is a poor reading, which suggests that softening demand is, for the time being, outweighing the positive effect on supply of improving supply chains and declining energy prices.
US
Americas CIO View: Stubborn inflation, deteriorating US fiscal health to curb bonds and stocks (DWS Group) - After the debt deal: US fiscal health to be 2024 focus of bond market and voters. DWS CIO Day views: S&P at 4200 June 2024, if Fed cuts, then pivot on election. Love the 2020s?: Slow global growth, interest rates to pre financial crisis norms.
US household wealth rose $3tn in the first quarter (ING) - A strong performance by equity markets lifted household wealth, helping to offset declines in real estate and cash, checking and time savings deposits. With wealth $35tn higher than before the pandemic households continue to have a strong platform to withstand intensifying economic headwinds, offering hope that any recession will be short and shallow.
Research US - Fed preview: On hold (Danske Bank) - We expect the Fed to maintain rates unchanged next week, markets price in a modest 25% probability of a 25bp hike. Focus will be on communication around potential hike in July & the updated dots. The Fed is unlikely to close the door for hikes, but we doubt they will materialize. We see downside risks to consensus expectations for May CPI, and forecast +0.2% m/m (4.2% y/y) for headline & +0.3% m/m (5.2% y/y) for core.
Fed likely to skip, but it’s going to be close (ING) - Market pricing has shifted massively over recent weeks, but we think the most likely outcome remains the Fed leaving policy rates unchanged on 14 June. There will be some dissent and a shock inflation reading could make it a very close decision. Either way, the Fed will leave the door open to further rate moves.
Europe
ECB Preview - Looking beyond next week (Danske Bank) - The ECB meeting next week will be a peculiar one, with a risk of no market reaction. On the one hand, the decision has already been well telegraphed (25bp hike and APP reinvestments to end from 1 July) and on the other hand guidance (with new staff projections) is likely a 'one-sided' risk for markets. Hawkish tunes from Lagarde on the back staff projections is at risk of being largely disregarded by markets.
Past the peak – European corporate margins down again? (Allianz) - Eurozone corporate profit margins reached 40.8% of gross value-added at end-2022 (+0.6pp above the long-term average). But the devil is in the details. Italy and Spain seem better positioned compared to Germany and France, notably in the manufacturing sector. However, excluding sectors with strong pricing power (such as transportation services and energy), margins are much lower and hit their lowest level since the mid-1980s in Q1 2023 in France.
EUR rates: Relentless steepening (Nordea) - Several risk factors have receded, and the main risk near term is the TLTRO expiry. Rates range trade in outright terms, while curve steepening continues relentlessly and spreads tighten. Tenor basis spreads await the TLTRO expiry.
Swedish May inflation preview: The downturn continues (Nordea) - We expect that year-on-year figures for CPIF as well as for CPIF ex energy dropped in May to well below the Riksbank’s forecast.
Spain | What is going on with consumption? (BBVA) - The main component of domestic demand, private consumption, shows declines that are more consistent with a historical contraction of activity than with the expansion we are experiencing.
Real Estate
Housing Affordability Posts Solid Gain but Still Much Lower from a Year Ago (NAHB) - Solid nominal wage gains (unadjusted for inflation) combined with lower mortgage rates and home prices helped to boost housing affordability in the first quarter of 2023, but ongoing building material supply chain issues and expected cooling of wage growth signal ongoing concerns for affordability conditions in the year ahead.
Commodities
Gold buyers look beyond current headwinds (Saxo Bank) - Gold has stabilized following last months drop below $2000 when rising yields and a stronger dollar triggered a correction which has now turned into consolidation. In the short-term the prospect of another rate hike and sticky inflation is weighing on prices but overall we maintain our bullish outlook for gold potentially seeing it reach a fresh record high when an incoming economic slowdown during the second half forces the Fed to pause and eventually to cut rates.
Weekly Pricing Pulse: Commodity price slide continues (S&P Global) - The Materials Price Index (MPI) by S&P Global Market Intelligence decreased 2.7% last week, the ninth consecutive weekly decline. The decrease was broad, as eight of the ten subcomponents fell. The story so far in 2023 has been one of falling commodity prices with the MPI decreasing in 17 out of the last 21 weeks. The index also sits 36% below its year-ago level.
Rates
Condensing complex macro readings into one number for rates (ING) - It's often tough to summarise macro circumstances into a simple implication for rates. Right now it's particularly tough. Here we illustrate the contradictions, and bring it together into one number for rates. For the US, that number is 6%. For the eurozone, it's 4%. These are not targets. But they are relevant references to contrast levels against.
PMI
Monthly PMI Bulletin: June 2023 (S&P Global) - The global economic expansion further accelerated midway into the second quarter, though it remains buoyed primarily by growth within the service sector. Divergence on the prices front persisted even as cost pressures further eased, which continues to call into question the implications for monetary policy and the growth trajectory going forward.
Markets
Central banks remain data dependent; data remains mixed (DWS Group) - In the first two months of the second quarter the markets were friendly. Despite slightly rising bond yields, equities continued to rise, driven by dreams of artificial intelligence inspired growth. Central banks face the difficulty that both economic growth and core inflation are proving slow to decline. In our new 12-month targets we assume a mild economic cycle, which should be sufficient to provide positive real returns for many asset classes.
Enduring the Muni Credit Cycle (Goldman Sachs) - Inherent in all cycles is that the best of times do not last forever. The current muni credit cycle is no different—resembling economic cycles before, revenue expansion will likely moderate just when expenses remain elevated. Unlike corporations, municipalities are typically less nimble, or incentivized, to immediately cut spending. Often states and local governments have mandated expenses that aren’t easily slowed or reversed, and sometimes the political environment also contributes to elevated spending. Despite these challenges we believe municipal credit is far more stable than similarly rated corporate credit.
FX
Monthly FX Outlook: There, and Back Again… (CIBC) - The T-bill deluge and a July rate hike could provide support for the greenback. USD sellers should still look to get active on rallies.
EM Traffic Light June 2023 (Nordea) - High inflation continues to impact most EM currencies. However, more countries are starting to turn the tide as inflation rates fall back.
Outlook
Central bank meetings in focus (S&P Global) - Central bank meetings in the US, eurozone, Japan, Taiwan and Hong Kong SAR will be the highlights next week as we hear central bankers' views on recent economic trends. Further insights into economic conditions will nevertheless be drawn from various data releases including US CPI, as well as retail sales and industrial production figures from both the US and mainland China. The UK will also publish official labour market and growth figures while the eurozone issues revised inflation numbers.
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