Chinese CPI Deflation Worst Since 2009
Macro and market developments for 2/8/2024
In China, we examine the latest CPI data, revealing the lowest growth since the financial crisis of 2009. Meanwhile, the Reserve Bank of India holds its policy rate amidst inflation risks, signaling a cautious approach. Federal Reserve speeches by Barkin, Collins, and Kugler shed light on the Fed's monetary policy stance and the evolving economic landscape. Plus, tensions escalate in the Middle East as Israeli Prime Minister Netanyahu rejects a ceasefire proposal from Hamas, impacting regional stability. Earnings reports from companies like Ralph Lauren, Siemens, Maersk, and Under Armour offer further insights into sector-specific trends.
China: CPI Growth Lowest Since Financial Crisis
China’s CPI grew 0.3% MoM in January, but the annual rate of increase fell to -0.8% YoY from -0.3% YoY in December. This is the lowest YoY rate recorded by China since the global financial crisis in 2009. Food prices continued to trend sharply lower from a year ago at -5.9% YoY while non-food prices fared better at 0.4% YoY. Both saw slight inflation on the month. In terms of goods and services, prices for the former were down -1.7% YoY (thanks to food deflation) while for the latter, price growth was positive at 0.5%. Overall, core CPI looks a bit healthier than headline CPI inflation, up 0.4% YoY, but not by that much.
There are some categories that contradict the headline trend of deflation. Price growth of household goods and services expanded 1.0% MoM and was also up 1.0% YoY. Tourism also appears to be in one of the healthier sectors of the economy as it saw strong growth of 4.2% MoM and a healthier annual rate of 1.8% YoY. In fact, the annual increase in prices for tourism is the highest across all categories and subcategories except for Chinese medicine (6.1% YoY), family services (2.0% YoY), and the other category (2.9% YoY). These small pockets of healthier inflation are not enough to distract from uglier price trends in the other aggregates, but they do speak to some evidence that Chinese consumers may still be looking to spend more in areas that were affected by COVID.
Another reason to remain concerned about the Chinese economy is the continued deflation in producer prices. China’s PPI fell -0.2% MoM and -3.4% YoY in January, down from -3.8% YoY in December. PPI growth has been negative on a monthly basis for the last three months and negative on an annual basis since January 2023. The decline has been broad-based for the most part but has been especially bad in industries affected by the real estate and food sectors like building materials (-7.0% YoY), wood & pulp (-5.9% YoY), and agricultural products (-5.8% YoY). There is also another notable signal of economic weakness in the further decline of consumer durables producer prices, down -0.4% MoM and -2.3% YoY, a category linked to consumers’ willingness to spend on more expensive items.
Reserve Bank of India: Rates Unchanged in Face of Inflation Risks
The Reserve Bank of India elected to keep its policy rate unchanged at 6.5% today. The RBI members also said that they will “focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.” They pointed to strong GDP growth and several risks to the disinflation process as the reason behind their decision. The key risk is in the potential for food shocks that could “interrupt the pace of disinflation” in core CPI readings. It also noted geopolitical events’ impact on supply chains and volatility in financial and commodity markets as upside risks. The RBI projects CPI inflation for 2024-25 “at 4.5% with Q1 at 5.0%; Q2 at 4.0%; Q3 at 4.6%; and Q4 at 4.7%.
In the News
Speeches by Fed Bank Presidents Barkin and Collins and FOMC Governor Kugler
Yesterday, Federal Reserve officials delivered speeches providing insights into the current economic landscape and the Fed's approach to monetary policy. Richmond Fed President Barkin addressed the Economic Club yesterday, highlighting the ongoing strength in demand and tightness in the labor market. In light of these factors, Barkin emphasized that the Fed still has to wait to see if inflation will stay down or if there will be more upward pressure. He expressed support for a cautious approach, saying "I'm very supportive of being patient in getting where we want to get,” stressing the importance of monitoring indicators to determine if inflationary pressures persist or escalate. Barkin attributed the odd combination weak consumer sentiment and robust spending to inflationary forces.
Boston Fed's Collins advocated for cutting rates"later this year," citing diminished concerns about above-target inflation. She expressed confidence in the trajectory of inflation but emphasized the necessity of confirming this belief with supporting data, stressing the importance of a comprehensive evaluation of available indicators to ensure sustained low inflation alongside a robust labor market. Collins specifically noted the need for further progress in services and shelter inflation which have been sticky. Additionally, she reassured on the state of financial stability, noting the well-capitalized position of banks.
During her address at a Brookings Institution event, FOMC Governor Kugler conveyed expectations for ongoing progress towards achieving the inflation target while acknowledging risks such as potential positive surprises in consumer spending. Kugler indicated that sustained moderation in inflation and labor markets “may make it appropriate to reduce the target range for the federal funds rate” but also if that progress stalls, it would be appropriate to hold rates at the current level. With two forthcoming inflation reports and an additional jobs report due by March, Kugler emphasized that it is too early to anticipate what the March meeting will bring. Moreover, she provided some reassurance regarding the overall stability of the banking sector saying that it is “generally sound,” but the Fed is keeping an eye on things, particularly commercial real estate.
Netanyahu Rejects Hamas Ceasefire Proposal
Israeli Prime Minister Benjamin Netanyahu appears to have outright rejected the proposal that Hamas sent in response to the plan negotiated by Qatar, Egypt, the US, and Israel calling it “delusional” and vowing that Israel would fight to achieve “absolute victory.” This rejection led US Secretary of State Blinken to leave the Middle East without a peace plan, straining Israel-US relations. Blinken notes that “there are things that Hamas sent back that are absolute non-starters.” Meanwhile, Netanyahu also expressed disregard for international concerns regarding potential military operations into the south of Gaza. Blinked continues to try and convince the Israelis to moderate their military response: “Israelis were dehumanized in the most horrific way on October 7, and the hostages have been dehumanized every day since. But that cannot be a license to dehumanize others.”
Earnings
Ralph Lauren (RL, consumer discretionary) sees comp sales that beat expectations. North America comps grew 5% which was above expectations, Europe revenue up 6%, and Asia comp sales up 14%. Recent pressure from cotton inflation is still expected to abate starting in Spring 2024 based on moderating cotton costs.
Siemens (SIEGY, industrial) posts better than expected profit, FQ1 profit was €2.39 bil (vs €1.69 bil expected) but revenue at €18.41 bil disappointed slightly (€18.58 bil expected). Smart infrastructure profit jumped 26% driven by demand for data centers and power distribution. Global orders in the digital industries division fell 31%, led by a decline in China. Factory-automation purchases in China plummeted 55%, “The Chinese market is still very slow.” Siemens left its outlook for the unit and the overall company unchanged and said it hopes to see a pick-up in China in this year's second half.
Maersk (AMKBY, shipping) reports earnings will fall sharply due to Red Sea disruptions. It blamed uncertainty in the Red Sea and industry overcapacity that continues to drag on freight rates for the gloomy outlook, and said it is not seeing a major boost from the jump in freight rates due to Red Sea disruptions. CEO Clerc said Maersk expects "significant oversupply challenges" in container shipping will materialize fully during 2024 and continue to be felt in 2025 and possibly into 2026. In Q4, sales fell -46% to $7.18 bilion as freight shipping rates crashed, EBITDA fell to $839 million down from $6.54 billion in Q4 a year ago and below expectations of $1.13 billion.
Under Armour (UAA, consumer discretionary) beats earnings but misses revenue slightly. Inventory fell -9% to $1.1 billion as revenue is expected to be lower in 2024. The 2024 outlook sees revenue down -3 to -4% slightly worse than the previous forecast of -2 to -4%. In 2024, Gross margin is expected to be better than previously thought in 2024 at 120-130 bps vs 100-125 bps forecasted before.
For more macro and market commentary, check out my Reddit feed.