Morning comment: Chinese inflation well-behaved, French IP trend intact

Chris Scicluna
Mantas Vanagas

While yesterday’s sell-off in US and European bond markets was shrugged off by equity investors in the Western Hemisphere, the major stock markets in the Asia-Pacific region have been mixed today. After China’s December inflation reports provided no reason to expect a more hawkish stance from the People’s Bank, Mainland China and Hong Kong posted solid gains. In contrast, higher bond yields seem to have weighed on equities in South Korea and Australia. In Japan, however, the Topix closed marginally higher even as the 10-year JGB yield nudged above 8bps for the time since July last year and the yen appreciated through ¥112/$ for the first time in more than a month following yesterday’s scaling-back of the BoJ’s longer-term bond purchases.

China’s December inflation reports pointed to some underlying moderation of inflation pressure, albeit with upstream prices continuing to advance at a decent clip. Producer prices rose a solid 0.8%M/M, but not enough to stop annual PPI inflation easing to 4.9%Y/Y from 5.8%Y/Y previously (albeit 0.1ppt firmer than market expectations). Producer goods prices rose 6.4%Y/Y, paced by higher prices for goods in the mining and raw materials sectors, whereas consumer goods prices rose just 0.5%Y/Y – the latter within the range of outcomes seen in recent months.

Meanwhile, the CPI rose 0.3%M/M in December, raising annual inflation by 0.1ppt to 1.8%Y/Y (0.1ppt below market expectations). This slight increase in annual consumer price inflation was due to a smaller decline in the food sector (prices fell 0.4%Y/Y in December, compared with 1.1%Y/Y in November). Annual inflation in the non-food sector eased 0.1ppts to 2.4%Y/Y. The core CPI (i.e. excluding food and energy) rose 2.2%Y/Y, down 0.1ppt from that recorded over the prior three months.

With both overall and non-food inflation running beneath the Government’s 3%Y/Y target, current inflation outcomes are placing no pressure on the PBoC to tighten monetary policy. Rather the focus of the PBoC is likely to remain on actions that will constrain the build-up of financial leverage. 

Euro area:
Following yesterday’s very strong German data – which saw total IP rising total output rising by 3.4%M/M, the biggest gain since September 2009, and manufacturing output up a whopping 4.3%M/M – this morning’s equivalent French figures saw moves in the opposite direction. In particular, after French manufacturers increased output by a vigorous (albeit downwardly revised) 2.5%M/M at the start of the fourth quarter, we saw payback in November, with output down 1.0%M/M. Construction output was also down, falling 0.5%M/M, but other components provided some offsetting support. So, overall, industrial production was down 0.5%M/M, a relatively modest drop following the rise of 1.7%M/M in October. Indeed, looking through the monthly volatility, manufacturing output was up a robust 2.1%3M/3M, with a similar rate of increase posted for total production. And even if we see a similar decline in December to that which we saw in November – which might seem unlikely given the strength of the surveys from the sector that month (e.g. the French manufacturing PMI rose to the highest level since 2000) – manufacturing output would still have grown more than 1%Q/Q in Q4, providing a welcome boost to overall economic growth in the euro area’s second-largest member state.   

Today will be the busiest day this week for new UK economic data, with the ONS releasing its short-term output indicators for November, including industrial production, construction output and trade figures. Given that the manufacturing PMI and other surveys from this sector were upbeat in November (e.g. the output PMI rose above 60 to a 13-month high), we expect to see manufacturing production posting a seventh consecutive monthly increase, having declined in each of the first four months of the year. However, despite the strength of export orders reported in recent months’ surveys, the goods trade deficit is still expected to have inched higher in November to around £11bn – a sizeable imbalance. Meanwhile, after a disappointing performance for construction last year – e.g. output in the sector was down 0.2%Y/Y in October – while we might see a monthly increase in November, the level of output looks set to remain lower than a year ago.

Ahead of Friday’s key release of December’s US CPI numbers, today brings import and export price indices for that month as well as wholesale trade figures for November. In addition, Chicago and Dallas Fed Presidents Evans and Kaplan will be speaking publicly.

The ABS job vacancies index rose 2.7%Q/Q in the three months to November, lifting annual growth to 16.1%Y/Y and the series to a new record high. This outcome is consistent with the recent strength recorded across the gamut of Australian labour market indicators.

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