China Macro: Producer price inflation at 11-year high – Yesterday, China’s inflation figures for May were published. Particularly eye-catching is the acceleration of producer prices. After having been mostly in negative territory between mid-2019 and late 2020, producer price inflation (PPI) accelerated sharply in recent months, and hit a post-global-financial-crisis high of 9.0% yoy in May. This (coupled with yuan appreciation versus USD since mid 2020) adds to some extent to concerns over a rising contribution from Chinese producer prices to a pick-up in global goods inflation. We should place this a bit into perspective, though. The acceleration in China’s PPI is strongly driven by a surge in commodity prices (see chart) and – given that China is the largest importer of commodities worldwide – the rise in PPI is to a significant extent driven by global rather than domestic factors.
What is more, producer price inflation needs to remain high for a sustained period to have a meaningful impact on global goods price inflation, while consensus expectation including ours is for an easing of PPI inflation in the second half of this year (partly reflecting base effects). In addition, Chinese producers typically do not fully pass on higher cost prices (and exchange rate movements) to their customers. Although China’s consumer price inflation (CPI) and core inflation have picked up in recent months, their pace (at 1.3% and 0.9% yoy in May, respectively) is still relatively low. Finally, Chinese policy makers are already reacting to contain price pressures going forward. Beijing has for instance taken steps to stem a further rise in domestic commodity prices, while the PBoC has intervened to slow the yuan’s appreciation versus USD. What is more, China’s credit cycle has already started turning, reflecting Beijing’s stronger focus on financial de-risking since late 2020 after the economy recovered strongly from the covid-19 shock. (Arjen van Dijkhuizen)
US Macro: Inflation could see another jump, but expectations are key – CPI inflation will be published for May today. We and consensus expect a significant deceleration in monthly inflation following the shock April print (consensus: 0.4%; ABN: 0.3%; April: 0.8%), although there is particular uncertainty over near-term inflation outturns, with the economy still to find a new equilibrium following the significant reopening steps of the past few months. For May specifically, we expect a continued rise in some core goods categories such as apparel, and further catch-up in housing rents, but for this to be partly offset by payback in some of the categories that registered exceptional strength in April, such as used cars (the strength of which we view as artificially inflated by stimulus check-related demand, and therefore unsustainable). We continue to think inflation over the coming months will be sending more noise than signal about the real outlook for inflation, and our base case remains that the current firmness will be transitory. However, we are concerned by the recent pickup in survey-based measures of inflation, such as the Michigan 5-10y expectations, which hit a near 8 year high of 3.0% in May. The preliminary June number will be published this Friday and will be a key focus for our inflation outlook. Inflation expectations are the most important determinant of longterm inflation, and while we have seen such spikes in the past that then quickly dissipated, a sustained rise in inflation expectations over the coming months would likely cause us to change our view on the inflation outlook and on the likely path for Fed rate hikes. We explored how such a scenario could play out in our latest Global Monthly. (Bill Diviney)
Euro Macro: Germany’s industrial sector takes a breather – Industrial production in Germany declined by 1.0% mom in April, which was well below the consensus forecast of an expansion by 0.4%. The decline in April was concentrated in construction output (-4.3% mom) and mining and quarrying (-8.4%), but manufacturing also fell (-0.6%). The detailed numbers show that within manufacturing, the biggest drop was recorded in consumer goods (-3.3%), which also was the item that rose the most in the month before (+2.7% mom in March). This suggests that the drop in April largely reflects payback and fits within the normal pattern of monthly volatility in output. Production of intermediate goods and capital goods declined by only 0.2% and 0.1%, respectively, in April, after they rose modestly in March. The idea that the decline in production in April is merely a temporary blip – to be followed by robust growth in the months ahead – was also underlined by the volume of new factory orders in April. Orders fell by 0.2% mom that month, following upon a rise by almost 4% in March. Compared to pre-pandemic levels (average December 2019-February 2020) the volume of orders has increased by almost 10%, whereas manufacturing production still is 5% below pre-pandemic levels. Indeed, the gap between the level of orders and the level of production has not been this high in the past twenty years. This suggest that there is considerable back-log in production. Last but not least, the high levels of Germany’s manufacturing PMI and the Ifo business climate in industry in May are in line with solid growth in production in the coming months. (Aline Schuiling)