Main Topic: China's inflation data for July
Key Points:
1. Consumer price index (CPI) fell by 0.3% in July from a year ago, but was up by 0.2% compared to June.
2. Producer price index (PPI) fell by 4.4% in July from a year ago, better than the decline in June.
3. Both CPI and PPI are in deflation territory, indicating weakening economic momentum and lacklustre domestic demand.
### Summary
The blog emphasizes that the war on inflation has been won, with the Consumer Price Index (CPI) showing a 12-month inflation rate of +3.3%. However, BLS's imputation of shelter costs using lagged data means that the CPI would be significantly below the Fed's target of 2%. The market believes that the current Fed Funds rate will remain unchanged for the rest of the year.
### Facts
- The economists at three Regional Federal Reserve Banks believe that a recession is coming, despite the official forecast of "no recession" from the Fed. The probability of recession is higher than during the last two recessions.
- The Conference Board's Leading Economic Indicators (LEI) have been negative for 16 consecutive months, which has a 100% track record in predicting recessions.
- The freight industry is experiencing a recession, with the Cass Freight Index down -8.9% over the year. Housing is also struggling, with mortgage loan applications at 30-year lows and significant declines in new and existing home sales.
- Seasonally adjusted retail sales for July were +0.7%, but the actual raw data fell -0.4% from June to July. The weak data suggests a different story than what the seasonally adjusted numbers portray.
- Home Depot, Target, and Walmart reported lower Q2 revenues, with general merchandise sales at Walmart contracting.
- Industrial Production rose 1.0% in July, driven by utility output and auto production. However, the seasonal adjustment may be questionable.
- Inflation rates in developed countries are just above 2%, with China experiencing deflation. One-year inflation expectations are rapidly falling, which is positive for controlling inflation.
- China's economy is faltering, with industrial production and retail sales declining. Q2 real GDP growth is anemic, and the crisis in the real estate sector is worsening. China's struggles will have a negative impact on the global economy and its major trading partners.
### Emoji
- 📉: Recession
- 📊: Economic indicators
- 🚂: Freight industry
- 🏘️: Housing market
- 🛍️: Retail sales
- 🏭: Industrial production
- 💰: Inflation
- 🇨🇳: China's economy
- 📉💼: Global economy
### Summary
JD.com, China's biggest ecommerce retailer, reported a 50% surge in net income and 7.6% increase in revenue, beating expectations, due to its low-cost strategy attracting customers during China's economic downturn and increased competition.
### Facts
- 💹 JD.com's net income rose 50% to 6.6 billion yuan ($0.9 billion) and revenue increased 7.6% to 287.9 billion yuan ($39.7 billion), exceeding projections.
- 📈 The company gained market share from rivals including Baidu, Alibaba, and Pinduoduo.
- 💰 Service revenue jumped 30% to 54.1 billion yuan ($7.5 billion).
- 🛒 JD.com attracted more vendors and customers with its low-cost strategy and "10 billion yuan" subsidy program.
- 🗣️ CEO Sandy Xu attributed the solid performance to the company's enhanced business structure and supply chain capabilities.
### China's Economic Woes
- 🇨🇳 China's economy has faced challenges including slowing growth, rising debt, a property bubble bust, and weak domestic demand.
- 📉 Gross domestic product (GDP) rose only 3% last year, the slowest pace in decades.
- 🛍️ Retail sales fell 8% month-over-month in July, with deflation of 0.3% year-over-year, reflecting weak domestic demand.
- ⬇️ Deflation can harm economies by discouraging spending and borrowing, leading to a slowdown in economic activity.
### Summary
The Chinese economy has slipped into deflationary mode, with retail sales, industrial production, and exports all missing forecasts. Shrinking domestic demand and a debt-fueled housing crisis are the main causes behind this slowdown.
### Facts
- 📉 Retail sales in July grew by 2.5% year-on-year, compared to 3.1% in June.
- 🏭 Value-added industrial output expanded by 3.7% y-o-y, slowing from 4.4% growth in June.
- 📉 China's exports fell by 14.5% in July compared to the previous year, and imports dropped 12.4%.
- 💼 Overall unemployment rate rose to 5.3% in July, with youth unemployment at a record 21.3% in June.
- 📉 Consumer Price Index-based inflation dropped to (-)0.3%, indicating a deflationary situation.
- 🏢 China's debt is estimated at 282% of GDP, higher than that of the US.
### Causes of the slowdown
- The debt-fueled housing sector collapse, which contributes to 30% of China's GDP.
- Stringent zero-Covid strategy and lockdown measures that stifled the domestic economy and disrupted global supply chains.
- Geopolitical tensions and crackdowns on the tech sector, resulting in revenue losses and job cuts.
### Reaction of global markets
- The S&P 500 fell 1.2% following the grim Chinese data.
- US Treasury Secretary warns China's slowing economy is a risk factor for the US economy.
- Japanese stocks and the Indian Nifty were also impacted.
- China's central bank cut its benchmark lending rate, but investors were hoping for more significant stimulus measures.
### Global market concerns
- China's struggle to achieve the 5% growth target may impact global demand.
- China is the world's largest manufacturing economy and consumer of key commodities.
- A slowdown in China could affect global growth, with the IMF's forecast of 35% growth contribution by China seeming unlikely.
### Impact on India
- India's aim to compete with China in the global supply chain could benefit if Chinese exports decline.
- However, if China cuts back on commodity production due to slowing domestic demand, it may push commodity prices higher.
### Summary
Oil prices rose in Asian trade, unfazed by China's disappointing interest rate cut, as the prospect of tighter supplies supported the outlook.
### Facts
- 💰 Oil prices rose in Asian trade, shrugging off China's interest rate cut.
- 🛢️ Concerns over slowing demand in China and rising US interest rates had driven steep losses in crude prices.
- 📉 China cut its one-year loan prime rate by 10 basis points to 3.45%, disappointing market forecasts for a larger cut.
- 🏢 Lack of changes in the mortgage rate raised concerns over a worsening real estate crisis in China.
- 🌍 Deep production cuts from Saudi Arabia and Russia are expected to limit crude supplies by nearly 70 million barrels over 45 days.
- 🇺🇸 Robust fuel consumption in the US, particularly during the summer season, pointed to tighter markets.
- 📈 Analysts expect oil prices to remain relatively higher for the rest of the year, despite the prospect of higher interest rates affecting US demand.
### Summary
European stock markets edged higher, supported by a drop in German producer prices and a smaller-than-expected rate cut from China. German producer prices fell significantly in July, indicating a retreat in inflationary pressures. The European Central Bank is considering a pause in its hiking cycle, which could help alleviate economic difficulties in Germany. In China, the rate cut announced by the People's Bank of China was seen as underwhelming, as analysts had expected a larger cut. The U.K. housing market also slumped, with the fastest decline in August since 2018. Oil prices rebounded, supported by the Chinese rate cut and expectations of lower output from top producers in August.
### Facts
- 📉 German producer prices dropped 1.1% in July and fell 6.0% annually, indicating a retreat in inflationary pressures.
- 🇩🇪 Economic difficulties in Germany are affecting the eurozone's growth and may lead to a recession.
- 🏦 ECB President's speech at Jackson Hole will provide clues on the central bank's next move in September.
- 🇨🇳 The People's Bank of China announced a smaller-than-expected rate cut, disappointing analysts.
- 🏘️ The U.K. housing market experienced its fastest decline in August since 2018.
- 🛢️ Oil prices rose due to the Chinese rate cut and expectations of lower output from top producers.
### Summary
China's fiscal revenue rose 11.5% in the first seven months of 2023, but at a slower pace than the previous six months, indicating a loss of economic momentum.
### Facts
- 💰 China's fiscal revenue increased by 11.5% in the first seven months of 2023.
- 💸 Fiscal expenditure grew by 3.3% to 15.2 trillion yuan ($2.10 trillion).
- 📉 In July, fiscal revenue only rose 1.9% year on year, slower than the previous month's increase.
- 📉 Fiscal expenditure fell 0.8% in July, narrowing the decline compared to the previous month.
- 🌍 China's economy grew at a sluggish pace in the second quarter due to weak demand domestically and internationally.
- 📉 The consumer sector in China experienced deflation in July, with analysts predicting persisting price stagnation for the next six to 12 months.
China's economy has slipped into deflation for the first time in two years, raising concerns about its post-pandemic recovery and drawing comparisons to Japan's struggles with stagnant growth and deflation in the 1990s, as China faces challenges in its property sector and a need to shift towards consumer spending.
China's economic slowdown, marked by falling consumer prices, a deepening real estate crisis, and a slump in exports, has alarmed international leaders and investors, causing Hong Kong's Hang Seng Index to fall into a bear market and prompting major investment banks to downgrade their growth forecasts for China below 5%.
Consumer spending growth is slowing as the economy stabilizes, with consumers prioritizing essential purchases and adjusting their spending habits in response to rising interest rates and financial pressures.
China's economic challenges, including deflationary pressures and a slowdown in various sectors such as real estate, are likely to have a global impact and may continue to depress inflation in both China and other markets, with discounting expected to increase in the coming quarters.
China faces challenges in rebalancing its economy towards increased consumer spending due to the economic growth model that relies heavily on investment in property, infrastructure, and industry, as well as the reluctance of households to spend and the limited social safety net; implementing demand-side measures would require difficult decisions and potential short-term pain for businesses and the government sector.
China's economic slowdown is causing alarm across the world, as it is expected to have a negative impact on global economic growth, leading to reduced imports and trade, falling commodity prices, a deflationary effect on global goods prices, and a decline in tourism and luxury spending.
China's rebound from zero-covid restrictions has resulted in weak growth and deflation, with the lack of consumer spending becoming a major concern for policymakers.
Consumer spending in China rebounded in August, with all categories, including apparel, automotive, food, furniture, appliances, and luxury, experiencing increased sales compared to July, according to a survey by the China Beige Book. Retail sales in July rose by 2.5% year-on-year, raising concerns about China's economic growth, but the August survey showed a surge in spending, particularly in the services sector, which saw continued strength in travel and hospitality. Additionally, corporate borrowing increased as the cost of capital declined, indicating a boost in business activity. However, China's property sector continued to worsen, with house prices barely growing and home sales declining.
Markets show signs of slowing after new economic data, with focus on Friday's jobs report and the possibility of a pause on rate increases. Oil prices are impacted by Chinese factory activity and expectations of supply cuts.
If China were to slip into a deflationary spiral like Japan in the 1990s, it could lead to a decrease in consumer spending, a weakened economy, and negative consequences for the rest of the world, including a slowdown in imports for the US and adverse effects on developing economies reliant on Chinese exports and investment.
Chinese consumer spending has rebounded in certain sectors, but concerns persist over the property market and GDP growth falling below 5%, according to Shehzad Qazi, managing director of China Beige Book.
British factories in August experienced their weakest month since the start of the COVID-19 crisis due to shrinking orders caused by rising interest rates, according to a survey, resulting in a decline in purchasing activity, inventory holdings, and staffing levels. However, the slowdown in domestic and export demand has alleviated inflation pressures, potentially leading to a decrease in goods price inflation. With the economy showing signs of a slowdown, the Bank of England is expected to raise rates for the 15th consecutive time, despite concerns that it may lead to a recession.
Falling prices in China, driven by a weakened economy, could benefit countries with elevated inflation such as the U.S., India, Germany, and the Netherlands.
British consumer spending growth slowed in August, despite a surge in cinema takings after the release of films like "Barbie", with spending on essentials such as food and fuel growing at its slowest rate since April 2020, pointing to a weakening economy.
China's services activity expanded at the slowest pace in eight months in August, indicating weak demand and a lack of stimulus measures to revive consumption in the country's second-largest economy.
China's services sector experienced a slowdown in business activity, resulting in the lowest level in eight months, as weaker foreign demand and sluggish overseas orders impacted consumption, despite economic stimulus efforts.
China's economy is showing signs of slowing down, including a decrease in GDP growth rate, declining exports, deflationary consumer price index, high youth unemployment, a weakening yuan, and a decrease in new loans, which could have global implications.
The US economy grew modestly in July and August, with signs of consumers relying more on borrowing to support spending after depleting their savings, while inflation slowed due to decreasing price pressures in the goods sector, according to the Federal Reserve's Beige Book report.
China's economic growth has slowed but has not collapsed, and while there are concerns about financial risks and a potential property crisis, there are also bright spots such as the growth of the new energy and technology sectors that could boost the economy.
Policymakers expect slower growth in China, potentially below 4%, as the country transitions to a consumption-driven economy, which could have a negative impact on the global economy and alleviate inflationary pressures.
China's exports and imports continued to decline in August due to weak overseas demand and sluggish consumer spending, posing challenges to the country's economic growth targets.
China's measures to support the property sector, such as lowering mortgage rates, have limited impact on consumer spending due to the dire economic outlook and lack of longer-term reforms, highlighting the need for resources to be transferred to consumers from other sectors of the economy.
China's consumer price index rebounded in August after slipping into deflation in July, indicating a post-Covid economic recovery, despite sluggish domestic consumption and concerns of a relapse into deflation in the coming months.
China's consumer prices returned to positive territory in August as deflation pressures ease, but analysts warn that more policy support is needed to boost consumer demand in the economy.
China's consumer prices returned to positive territory in August, increasing by 0.1% from a year earlier, while producer prices fell for the 11th consecutive month; analysts expect consumer prices to recover and services inflation to pick up as energy prices stabilize and the output gap narrows.
Japan's annual wholesale inflation slowed for the eighth consecutive month in August, providing relief for households and retailers affected by previous increases in raw material imports.
Consumer spending in the US is showing signs of cooling, with retail sales expected to slow down in August, indicating that the resilience of the consumer may be waning due to increased borrowing, depleted savings, and the impact of inflation.
China's factory output and retail sales grew at a faster pace in August, but declining investment in the property sector poses a threat to the country's economic recovery.
U.S. retail sales rose more than expected in August due to higher gasoline prices, but underlying spending on goods slowed as Americans faced increased inflation and borrowing costs, while the trend in underlying spending on goods was not as robust as initially thought in July. Despite this, overall consumer spending is expected to remain strong, driven by spending on services.
Chinese economic data showing strength in consumer spending and manufacturing activity boosted Asian markets, with Hong Kong's Hang Seng Index rising 0.8% and Tokyo's Nikkei 225 surging 1.1%, despite concerns about a slowdown in China's economy.
Signs of improvement in China's economy, such as improving credit demand and easing deflationary pressures, may not be enough to stabilize the economy due to bigger concerns of decreasing affordability, tight wages, and rising costs that have not been addressed. A comprehensive policy revamp may be necessary for China's economy to recover.
China's economic data for August shows a mixed picture, with retail sales and production on the rise, property investment declining, and the urban jobless rate ticking downward, leading experts to believe that while there may be modest improvements in growth, a strong recovery is still unlikely.
The US economy experienced a slowdown in August due to a decrease in industrial activity, according to data from the Federal Reserve Bank of Chicago.
Profits at China's industrial firms decreased by 11.7% in the first eight months of the year, but the pace of decline eased slightly, suggesting a modest recovery is taking place due to policy support measures.
Japan's core inflation slowed for the third consecutive month in September, mainly due to falling fuel costs, providing some relief for the fragile economic recovery; however, factory output remained flat in August, indicating the negative impact of weak global demand and China's economy.
China's economic growth appears to be slowing down, with issues such as an aging population and a collapsing housing sector leading to speculation that the country's economic miracle may be coming to an end, while its diplomatic strategies have also caused strain on international relationships.
China's factory and services sectors experienced slower growth in September due to weak external demand, despite an increase in output, with the property slump, falling exports, and high youth unemployment clouding the economic outlook.
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