J.P. Morgan Pushes Out Timing Of China Rate Cut Post Firmer CPI

The US Bank has pushed out the timing of the next rate cut in China from March to Q2, post the stronger than expected CPI print on Saturday, see below for more details:

• J.P. Morgan: "The stronger-than-expected CPI reading in February is positive news amid the worry about deflation risk, though it may largely reflect the LNY seasonality. Whether the CPI reflation in February is one-off or will continue is important to watch out in the coming months.
• We maintain our forecast that deflation will end in 2024, but low inflation will continue to stay in 2024. The end of deflation will be driven by: (1) global commodity price likely will bottom out, as our global commodity team expects Brent oil price to move up to an average of $83 in 2024; (2) pork prices could also bottom out. However, the demand-supply imbalance and excess capacity concerns will not fade quickly, especially as there seems no signal that the policy bias will shift meaningfully from supporting investment and production to supporting consumption and domestic demand. In the government work report to be approved by the NPC, it listed some measures to support domestic demand (e.g. trade-in for home appliance and NEV, support for elderly care, childcare and other service consumption), but overall the policy priority is still on industry upgrade and investment. In addition, we believe housing market weakness will linger on this year, hence the softness in house prices and rental costs will continue. Wage reduction and deferred payment in some sectors (e.g., government employees in some regions and regulatory headwind sectors) also weigh on the inflation dynamics. Overall, our forecast for full-year 2024 CPI inflation now stands at 0.6%. Together with ongoing softness in PPI, nominal GDP growth will likely average at 5.3%yoy for full-year 2024 (notably below the government’s implicit assumption of 7.4%yoy). General weakness in pricing power and nominal GDP growth drags corporate revenue, cash-flow and profit trends, exerting further stress on private corporate confidence and investment.
• Our forecast expects the next policy rate cut in March. The upside surprise in CPI readings (not only headline CPI but also core CPI, non-food and service prices) lead us to push out the timing of next rate cut from March to 2Q. The timing of next rate cut will depend on the inflation dynamics in the coming months, the ability of banks to manage NIM pressure, and further clarity in Fed’s policy rate outlook.