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
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.
Asian stock markets rebounded from an eight-day losing streak, supported by a recovery in Chinese shares, while benchmark Treasury yields reached a 16-year high on concerns of sustained high interest rates.
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.
Hong Kong stocks rebounded as traders considered the recent market slump to be excessive, with Chinese tech leaders such as Alibaba, AIA, and NetEase leading the way.
China's stock market indexes experienced a brief bounce of over 5% before giving up most of the gains, following new government measures to reduce trading costs and boost stocks, raising questions about the severity of China's economic problems and whether they can be resolved through stimulus measures.
Chinese stocks rebounded briefly after Beijing implemented measures to halt the slide, but foreign investors used the opportunity to unload $1.1 billion of mainland Chinese equities, reflecting ongoing nervousness about holding capital in China.
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.
High energy prices and strong economic growth could lead to a rebound in inflation, with prices likely hovering around 5%, according to a former White House economist.
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.
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.
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.
China's stock market rebound may be temporary as corporate earnings continue to decline and companies revise down their outlooks, causing concern for foreign funds and prompting Bank of America to urge caution.
China's new yuan loans are expected to rebound in August after a decline in July, as the central bank implements measures to support economic growth during soft domestic and international demand.
Financial markets are preparing for a rebound in U.S. inflation in August, driven by higher energy prices, which could disrupt expectations of easy inflation control by the Federal Reserve.
China's consumer prices rose slightly and the decline in factory-gate prices slowed in August, indicating easing deflation pressures and signs of stabilization in the economy, although more policy support is needed to boost consumer demand.
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.
The U.S. Consumer Price Index (CPI) is expected to have jumped 0.6% in August, driven by resurgent oil prices, while the core CPI is anticipated to have dipped to a 4.3% year-over-year pace; this higher inflation has dampened the summer rally for bitcoin and other cryptocurrencies, as interest rates are likely to stay higher and for longer than anticipated by investors.
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.
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.
China's economy showed positive signs of recovery in August, with an increase in industrial output, retail sales, and consumer inflation, indicating resilience despite concerns of "stagnation" or "collapse" in Western media reports; willingness to spend also recovered, with an increase in residents' income, per capita consumption spending, and domestic tourism; furthermore, China's exports remained resilient, with a steady increase in the export share of intermediate and capital goods, outweighing the decline in the export share of consumer goods.
Inflation is expected to rebound in 2024 due to a mismatch between supply and demand created by the shift from services to goods during the pandemic, as well as a chronic shortage of workers, according to BlackRock strategists. This could lead to higher interest rates and a higher risk of recession.
China's all-sector price index has reached its highest level in 14 months, indicating that the worst may be over for the country's economy and reducing concerns of deflation similar to that experienced by Japan.
China's small economic rebound appears to have stalled in September, with weak retail sales, manufacturing production, and loan growth, raising concerns about anemic third-quarter growth and the country falling short of its growth target.
Asian markets are expected to rebound following a relief bounce around the world on Wednesday, with currency traders keeping an eye on inflation reports from across the continent.
