Chinese inflation surged in January

Emily Nicol
Chris Scicluna

Overview:
While the coronavirus death toll has risen to 908, overtaking that of SARS, and yesterday brought a new daily record for fatalities (97), much (but by no means all) of China returned to work today from the extended Lunar New Year holiday. And while they opened lower, China’s stock indices eventually closed up on the day (CSI300 up 0.4%), unperturbed by a steep rise in inflation that the PBoC is also likely to ignore. Elsewhere in Asia, however, the main stock-markets failed to recover lost ground, with Japan’s TOPIX closing down 0.7% despite a slightly improved Japanese economy watchers survey. The cautious mood was also seen in bond markets, with USTs little changed from Friday evening (with yields therefore down from before Friday’s mixed bag of US labour market data). JGBs and ACGBs played catch up from Friday’s moves in USTs, opening higher and staying there.

Looking ahead, the coming week will bring several notable economic data releases, including US CPI inflation (Thursday) and retail sales (Friday), and Q4 GDP figures from the UK (tomorrow) and Germany (Friday). The GDP figures are set to be weak, with a significant risk of negative prints for both countries, with Friday’s dire industrial production figures having raised the risk of a downwards revision to zero in the estimate of euro area Q4 growth too. Meanwhile, beyond the data, Jay Powell, Mark Carney and Christine Lagarde will all speak publicly in front of their respective lawmakers.

Japan:
Despite increasing concerns about the extent of the hit to Japanese growth from the coronavirus, the latest economy watchers survey suggested a further improvement in economic conditions at the start of the year. In particular, the headline indicator increased for the second successive month in January, by 2.2pts to 41.9, a seven-month high. This in part reflected a further notable improvement in retail-related demand – the relevant DI rose 4.8pts in January to leave it more than 11pts above October’s trough – while there was also a modest pickup in corporate-related demand, with the relevant index rising 0.5pt to a four-month high of 41.7. 

Overall, however, the diffusion indices still remain well below levels seen through much of Abenomics and firmly below the key-50 level that indicates ‘improving conditions’. And economy watchers considered there to have been ‘weak movements in the recent recovery’. Certainly, they were notably more downbeat about the outlook over the coming three months, with the associated DI down 3.7pts to a four-month low. Taken together with other recent indicators, as well as the likely hit to Japanese exports and its tourism sector associated with the coronavirus, today’s release supports our view that Japan’s economy will return to only very modest growth – if any – in the first quarter of the year following a notable consumption tax hike-related contraction in Q4.

Later this week, the data calendar will bring just producer price inflation figures on Thursday, which will provide an insight into nationwide price pressures at the start of the year and are likely to show a notable increase annual rate due to energy inflation. Meanwhile, ahead of the first estimate of Q4 GDP (due 17 February), Friday’s release of tertiary activity figures will provide an update on conditions in the services sector at the end of last year and some indication into the likely contraction in overall output in the final quarter of 2019.

China:
Chinese inflation surged ahead of expectations, with the annual CPI rate up 0.9ppt in January to 5.4%Y/Y, the highest since November 2011. The increase largely reflects supply-side factors, including the initial impact of the coronavirus on availability of goods as well as continued pressures on meat prices (pork inflation rose 19ppts to 116%Y/Y). But while overall food inflation rising 3.2ppts to 20.6%Y/Y, the highest since 2008, non-food CPI inflation rose just 0.3ppt to a still-tame 1.6%Y/Y. Services inflation also remained subdued, up 0.3ppt to 1.5%Y/Y, and core inflation (ex food and energy) edged up just 0.1ppt from the near-four-year low the prior month to 1.5%Y/Y. Meanwhile, producer price inflation popped back into positive territory for the first time since last May, with a rise of 0.6ppt to 0.1%Y/Y. The rise partly reflected base effects from energy prices shifts, and the underlying report was soft (e.g. producer prices of durable consumer goods remained close to a decade low at -2.3%Y/Y).

Looking ahead, not least due to developments in commodity markets, PPI inflation is likely soon to slip back into negative territory. And while supply-side disruptions from the coronavirus might well add to upwards pressure on consumer goods prices, services inflation should ease given the inevitable drop in demand as individuals seek to minimise face-to-face contact. The authorities seem highly likely to continue to look through the upside price pressures from the supply side, and instead focus on supporting demand. Indeed, with the hit to economic growth from the coronavirus set to be greater than that from SARS in 2003, we expect more aggressive cuts in reserve requirements to come and a 25bps benchmark rate reduction to ensue in due course.

Euro area:
One focus in the euro area this week will be Friday’s release of German Q4 GDP data. Given the marked weakness in December’s retail sales and production figures, Germany’s economy now looks to have gone into reverse in the final quarter of 2019. We forecast growth of -0.1%Q/Q, to mark the second quarterly decline in the past three and leave each of the three largest euro area member states in contraction. As such, we also see a risk that the updated euro area GDP figure (also due Friday) will revise down growth from the flash estimate of 0.1%Q/Q, 1.0%Y/Y. Friday will also bring euro area employment figures for Q4, which, despite the softer economic backdrop, are likely to show that growth stepped up slightly from the 0.1%Q/Q increase of Q3.

Among the monthly releases, euro area IP data are due on Wednesday. Following last Friday’s shockingly weak showings from the larger member states (for more details see Friday’s euro wrap-up), these seem likely to show a marked decline in manufacturing output in December of about 2.0%M/M to leave it down more than 1.0%Q/Q in Q4. (Italy’s IP data due later this morning seem likely to add to the negative tone). Friday will also bring aggregate euro area trade figures for the same month.

Meanwhile, among member state releases, this morning saw the Bank of France’s latest business sentiment survey suggest that conditions in the industrial sector were little changed at the start of the year, with the headline index moving sideways at 96, nevertheless close to the bottom of the recent range, with producers indicating weaker output in January but anticipating a pickup in February on the back of higher orders. In contrast, services activity reportedly jumped at the start of the year despite ongoing disruption caused by pension-related strikes, leaving the sector’s overall sentiment indicator up 1pt to 98, albeit still the second-lowest reading since October 2016. But with stronger output in the construction sector, sentiment rose 1pt to 106, matching the highest reading the since the series began more than a decade ago. As such, the Bank of France today assessed its survey to be consistent with GDP growth of 0.3%Q/Q in Q1. (It is worth noting, however, that the Bank of France’s survey had implied growth of 0.2%Q/Q in Q4, compared with the actual outturn of -0.1%Q/Q.)

Final German and Spanish CPI for January are Thursday and Friday respectively. Elsewhere, ECB President Lagarde and Executive Board Members Lane and Schnabel are all due to speak publicly tomorrow. Lane will also speak publicly on Wednesday and Thursday, with fellow Board member Panetta also speaking on Thursday.

UK:
The main event in the UK this week will be tomorrow’s flash estimate of Q4 GDP. While monthly data are expected to show some bounce back in activity in December (IP, services, construction and trade figures also due) and the end-October Brexit deadline will have distorted the demand profile, overall the UK’s economy is anticipated to have slowed in the final quarter of the year. The Bloomberg consensus is for zero growth in Q4 – in line with the BoE’s assumption – to leave output up just 0.9%Y/Y, the softest annual pace since Q110. But we are a touch more downbeat, expecting output to have contracted by 0.1%Q/Q, with household consumption and business investment set to have remained very weak.

Tomorrow will also bring the BRC’s latest retail sales monitor, which will provide an update on spending habits at the start of the year. This will be followed on Thursday by the RICS residential housing market survey for January. Elsewhere, soon-to-depart BoE Governor will speak before the House of Lords Economic Affairs Committee on Tuesday. Later that day, MPC member Haskel – one of the two that voted for a 25bps rate cut in each of the past three policy months – will speak on ‘monetary policy in the intangible economy’.

US:
The focus in the US in the first half of the week will be Fed Chair Powell’s testimony to the Senate and House committees tomorrow and Wednesday. But in line with the message from Friday’s Monetary Policy Report, Powell is bound to reiterate that the Fed considers the current policy stance to be appropriate for as long as economy conditions align with its forecast, therefore implying that the Federal Funds Rate is on hold for the time being.

Meanwhile, after a quiet first half to the week for economic data – tomorrow will bring the NFIB small business survey and JOLTS job openings figures – Thursday will see the first top-tier release of the week, with January inflation figures expected to show increases of 0.2%M/M in both the headline and core measures. As such, the annual headline CPI rate is forecast to have shifted slightly higher by 0.2ppt to a fifteen-month high of 2.5%Y/Y, on the back of energy price movements. Core inflation, however, is expected to move shifted slightly lower by 0.1ppt to 2.2%Y/Y. The following day will bring retail sales figures for January, expected to report another solid increase at the start of the year, while the latest IP report for the same month seems likely to disappoint, with manufacturing output forecast to have more than reversed the increase in December. Friday will also bring the preliminary University of Michigan consumer sentiment survey for February.

Australia:
This week’s most notable releases come tomorrow, including the NAB business sentiment survey for January. This seems bound to show that conditions deteriorated at the start of the year as the bushfire crisis escalated in the first half of the month. Tomorrow will also bring the latest ANZ Roy Morgan weekly consumer confidence indicator, as well as the latest lending figures for December.

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