CHINA DATA: Dec Inflation Close To Expectations, Core CPI Improves Modestly
China headline Dec inflation figures were close to market expectations. The CPI rose 0.1%y/y, as expected (prior was 0.2%), while the PPI was -2.3%y/y, versus -2.4% forecast and -2.5% prior. In m/m terms, the CPI was flat, while the PPI fell -0.1%.
- For headline a drag came from food, which fell -0.5%y/y (against a 1.0% rise in Nov). Non-food inflation ticked up to 0.2%y/y, from flat in Nov. Consumer goods were down -0.2%y/y, while services were 0.5%y/y, in line with recent trends.
- Core inflation (ex food and energy) was +0.4%y/y, up from recent cycle lows of 0.1% (seen in Sep last year).
- By sub category trends were mixed. Household items and transport were drags in y/y terms, while clothing, medical and recreation were positives.
- An argument could be made that China government bond yields have overshot to the downside given the modest improvement in the core inflation trend. The chart below plots core CPI y/y against the 10yr government bond yield.
- Still, there are lots of other moving parts in terms of PBoC easing expectations and still likely asset allocation flows into the bond market. The base case is that yield up moves are still likely to draw bond buying interest from the market
Fig 1: China Core Inflation Against 10yr Government Yield
Source: MNI - Market News/Bloomberg
- On the PPI side, all sub categories, except for daily use items remain in negative y/y territory. The positive momentum seen in global commodity prices may help disinflation in the raw materials space lesson (currently at -2.2%). Still manufacturing remains negative at -2.7% as do consumer goods. The consumer durables sub category was -3.1%y/y for Dec.
- The PPI is continuing to argue for less CNY NEER upside, see the chart below. However, with the authorities guarding against USD/CNY gains, the yuan may continue to outperform any further bouts of broad USD strength.
Fig 2: CNY NEER Y/Y & China PPI Y/Y (6 months Forward)
Source: MNI - Market News/Bloomberg
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China's Investment Potential Remains Substantial - NDRC Official
China’s potential investment in green transformation and industrial upgrading remains substantial, especially in quantum technology, artificial intelligence and aerospace, said Zhao Chengfeng, deputy director of the investment department at the National Development and Reform Commission, Xinhua News Agency reported. Meanwhile, high levels of water conservancy investment are needed given flood disasters, while urban underground pipeline renovations to improve gas, water and heating supply need about CNY4 trillion investment over the next five years, said Zhao.
China November CPI Impacted By High Temperatures
China’s lower than expected November CPI print of 0.2% y/y was mainly due to high temperatures and a strong rebound in the supply of fruit and vegetables, according to Wang Qing, chief macro analyst at Orient Securities. Looking ahead, Wen Bin, chief economist at China Minsheng Bank, said CPI would be supported by higher seasonal winter demand for meat, while temperature drops may affect the production and storage of fresh food. CPI may also rise as incremental policies continue improving domestic demand and consumer confidence, Wen added.
AUSTRALIA DATA: NAB Business Survey Points To Another Weak Quarter
November NAB business survey came in weak with conditions down to 2.4 from 7.2, the lowest since end-2019 outside of Covid. Confidence fell to -2.8 from +5.3. There was weakness across components but cost pressures picked up while final product prices remained in line with the historical average. The data is suggesting another soft quarter, but little further progress on inflation. The RBA is widely expected to leave rates at 4.35% later today.
Australia NAB business conditions & outlook
- Labour cost growth remained at 1.4% 3m/3m but purchase costs increased to 1.1% from 0.9% but still below this year’s average. Final product prices rose at 0.6%, unchanged from October, but retail prices eased to 0.6% from 1.1%.
- Capacity utilisation remains above the series average implying that inflation pressures will only come down slowly.
- The RBA has been concerned about services inflation and NAB reported that services conditions were higher.
Australia NAB price/cost components
Source: MNI - Market News/Refinitiv
- Employment moderated to 2.5 from 3.3 but remains above the low for 2024. November jobs data print Thursday and the unemployment rate is forecast to rise 0.1pp to 4.2%.
- Profitability fell to -0.8 in November from +5.2, the first negative since January 2022. Q3 profits fell again driven by the mining sector and that seems to have continued in Q4 given softer commodity prices. Trading fell to +5.4 from +13, the lowest since pandemic-impacted 2020.
- Forward-looking orders fell to -4.8 from -3.0, but remain in line with the 2024 average. The drop was driven by mining and retail. Exports also deteriorated.
