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Negative CPI Y/Y Momentum Expected To Be Temporary, PPI Deflation Moderates

CHINA DATA

China July inflation outcomes were close to expectations. The headline y/y CPI printed at -0.3%, versus -0.4% consensus forecast and flat prior. The m/m was +0.2%, versus -0.2% in June. This is actually the first m/m rise in the headline since January of this year. Services inflation rose 1.2% y/y, while for consumer goods, we slipped further into deflation at -1.3%, the fourth straight month of negative y/y outcomes.

  • The core CPI measure rose to 0.8% y/y, versus 0.4% in June. This puts us back into the range that has prevailed for this metric since late last year. The chart below overlays this against the 2yr government bond yield.
  • In terms of the detail, 7 out of 8 sub categories saw a firmer y/y readings compared to June. Recreation and education were a noticeable increase (up to 2.4% y/y from 1.5%). Only food fell, down to -0.5% from 2.0% in June.
  • So, some signs of less deflation, coupled with more favorable base effects, suggests headline inflation in y/y terms can track higher in H2. The NBS stated as much post this data indicating the y/y drop is temporary.
  • Still, market confidence around the growth backdrop is likely to far from assured.

Fig 1: China Core CPI Y/Y & 2yr Government Bond Yield


Source: MNI - Market News/Bloomberg


  • On the PPI side, we were slightly below consensus at -4.4% y/y (versus -4.0% forecast) but improved on the June outcome of -5.4%. The detail showed less deflation in mining -14.7% y/y (prior -16.2%) and raw materials -7.6%y/y (-9.5% prior), which is line with higher spot commodity prices.
  • Manufacturing price falls eased to -3.8% (prior -4.7%), while consumer goods remain in deflation at -0.4%, weighed by durables at -1.5%.
  • Reduced PPI deflation argues for less CNY NEER weakness, albeit at the margins, see the second chart below. The CNY NEER has stabilized in recent weeks, but remains comfortably in negative y/y territory.

Fig 2: China PPI Y/Y & CNY NEER Y/Y

Source: MNI - Market News/Bloomberg

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