Chinese inflation data

Consumer prices in China came in as expected at 5.5%y/y increase, which is the lowest level since May of this year. PPI numbers out at the same time showed a 5.0% rise in producer prices over the last year, this was lower than the 5.7% expected increase. Food price increases showed the biggest slowdown, rising 11.9%y/y to October compared with 13.4% to September and consumer goods prices as a whole rose 6.6%y/y in October lower than the 7.3% increase in September. On the back of this news risk currencies like the Aussie and Kiwi started to slide, as investors were seemingly disappointed by the figures. This could be due to the fact that whilst the headline figure came down, the prices of some sectors like clothing and alcohol increased at a greater annual pace in Octber relative to the previous month.

Inflation has now cooled for the fourth month in a row. Nonetheless, the question remains: do these figures provide scope for a loosening of monetary policy? We think that it provides opportunity for the central bank to reduce reserve requirements, and does increase the chance of full blown policy easing. Also, given the low PPI figure we could see this feed into consumer prices in the coming months, thus bringing future inflation readings ever closer to the central’s banks 4% targeted level.

The onus is definitely on the central bank of China to cut rates or at least halt its tightening policy for a prolonged period of time. The property sector has cooled and the Eurozone debt crisis has stepped up a gear now that Italy is in the fray, which leaves Chinese growth dynamics extremely vulnerable.

Going forward, previous measures to tighten monetary policy may be unwound if inflation continues to fall. If this happens then easing by China could stimulate growth in the region and thereby provide a boost for risk assets. Nevertheless, there is still a long way to go until inflation is within the target levels, and the central bank will not want to act too soon and risk inflation rising back above 6%y/y.

Also, out of China today we had retails sales figures and industrial production at 17.2%y/y and 13.2%y/y respectively. Both numbers came in below expectations of 13.4%y/y and 17.6%y/y respectively. However, a preoccupied market failed to react to the news.

Source: Forex.com

09.11.2011