Chinese PPI inflation continues higher

Chinese inflation data showed a further increase in producer prices in May (Chart 2). PPI increased 0.5% m/m in May, the third monthly increase, driving the annual rate up to -2.8% (consensus -3.2% y/y) from -3.4% y/y in April. Deflation pressure has thus changed to inflation pressure at the producer level.
As we have highlighted before, Chinese producer prices are driven mainly by commodity prices with a small lag (see chart overleaf) and the increase in PPI is a mere reflection of higher metal prices at the beginning of 2016. Metal prices moved sideways in April and May and, in our view, PPI m/m changes should come down in June.
The rise in producer inflation is positive for industrial profits (Chart 4) and we estimate profit growth stayed positive in May.
CPI inflation surprised on the downside in May, moving down to 2.0% y/y, from 2.3% y/y in April. This is driven by lower food prices, as inflation in vegetable prices has moved lower. Inflation excluding food was unchanged at 1.1%; thus, it still points to very subdued inflation pressure. The inflation target for 2016 is 3%.
The main takeaway is that deflation pressure in the industry has changed rapidly due to higher commodity prices. As we look for a further gradual rise in commodity prices on the back of the pickup in Chinese construction, we expect producer price deflation to be over for now and see moderate inflation at the producer level. It has little implication for monetary policy, which is currently guided mainly by economic activity.

Allan von Mehren Danske Bank A/S

Download Full Flash Comment

Author

Allan von Mehren

Danske Bank A/S

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.