China: Inflation finally emerges from the factory - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that there was some interesting data released from China today that could have repercussions for broader financial market price action over the coming weeks as CPI and PPI data were released with both surprising to the upside.

Key Quotes

“The CPI annual rate accelerated from 1.3% in August to 1.9% in September, which was a much larger increase – although at 1.9% the level is not concerning. The PPI annual rate increased from -0.8% to +0.1% and while this level of  course is also not concerning, the positive  print does mark the first factory gate inflation in China since January 2012. While there is no trend yet in the CPI annual rate, the trend is very clear in PPI with the annual rate now up for nine consecutive months from a low of -6.0% in December. This is notable and may well have reverberations globally given China has been one key source of global disinflation/deflation in recent years. Negative PPI has been synonymous with China’s problems of excess capacity that emerged as a consequence of the fiscal stimulus post-GFC.

Is that problem ending? Perhaps not, but this development sits with the current narrative in regard to long-term yields and some different influences that are beginning to put some upward pressure on yields.

The BoJ’s shift away from an emphasis on asset purchases; the OPEC production cut lifting oil prices; the belief that countries like the US and UK will shift toward a more expansionary fiscal policy next year; the ECB’s wish to taper are already the key themes related to this narrative and now we can add another.

While we don’t agree with all of these points, we can’t ignore the theme and if the China data today strengthens the narrative we would cite further yen depreciation as the FX play that could follow.”