A hot PPI and a soft CPI is a poor mix for China’s growth outlook. It points to margin compression for manufacturers and weak domestic demand, which weighs on sentiment toward Chinese equities and keeps expectations of policy support alive. For the yuan, softer underlying inflation argues for easier policy at the margin, a mild negative. For the Australian dollar and commodity currencies, the read is mixed: firm producer prices reflect cost pressure rather than a demand-led recovery in China’s appetite for raw materials. For oil, the PPI surge mainly shows the energy shock feeding through, not new demand strength.
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Earlier:
China steps up market stabilisation push: three short-term priorities for equities
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China’s factories are facing their fastest price rises in years while consumer inflation slips further below 1%, a split that points to squeezed margins and fragile domestic demand rather than any healthy reflation.
Summary:
China’s October PPI rose 5.7% y/y, beating the 5.3% forecast and up from 5% in September.CPI rose 0.7% y/y, below the 0.8% expected and down from 0.9%.CPI was flat month-on-month, in line with forecasts, after a 0.2% rise in September.Core CPI eased to 0.8% from 1%, below the 0.9% forecast.The gap between producer and consumer inflation has widened to around five percentage points.Trade data is due Tuesday, with credit and money supply figures later in the week.
China’s factory-gate inflation accelerated more sharply than expected in October, while consumer price growth slowed below forecasts. The result widens the gap between surging producer costs and weak household demand.
The producer price index rose 5.7% from a year earlier, well above expectations of around 5.3% and up from 5% in September, when it had already reached a four-year high. Consumer prices increased 0.7% year-on-year, slightly below the 0.8% forecast and down from 0.9% in September. They were flat on the month, in line with expectations, after a 0.2% gain in September. Core inflation, which excludes food and energy, eased to 0.8% from 1%, also undershooting forecasts of 0.9%.
The divergence between the two measures has now widened to around five percentage points. Producer prices are being driven higher by energy and other input costs, while consumer prices show little sign of following. That suggests manufacturers and retailers are absorbing much of the cost increase rather than passing it on, a reflection of soft domestic demand and limited pricing power.
The core reading is the more telling figure for the health of the domestic economy. A slowdown in underlying inflation to below 1% points to subdued demand for services and non-essential goods, despite some support from spending around the National Day Golden Week holiday at the start of October.
For policymakers, the mix is awkward. Weak consumer and core inflation strengthens the case for further support for domestic demand. The jump in producer prices, though, limits room for aggressive easing and squeezes industrial profit margins at a time when firms are already facing higher energy costs linked to the war with Iran.
The data come as Beijing is also moving to shore up confidence in its stock market, with a recent State Council meeting calling for stronger capital market stabilisation mechanisms.
Attention now turns to October trade data due on Tuesday, which will show whether export strength can continue to offset sluggish domestic demand. Credit and money supply figures follow later in the week.
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This article was written by Eamonn Sheridan at investinglive.com.