Chinese Inflation Hits 32-Month High

Daily Analysis - 14/02/2017

Consumer Price Growth Accelerates as Producer Prices Rise

The inflation indices released overnight from China showed another month of gains for local prices as both consumer and producer price inflation continued to trend higher following numerous moves by the PBOC and Central Government to ease monetary and fiscal policies.

Chinese Inflation Rebound Endures

In a sign that a weaker Yuan combined with fiscal stimulus are helping to spur inflation in the economy, the latest Chinese inflation figures released by the National Bureau of Statistics showed the headline annualized CPI figure rise to 2.50%. Besides marking the highest point since May of 2014, the figure’s gradual improvement gives the People’s Bank of China some breathing room. The primary drivers of these gains were food prices with consumer goods also pressuring the data higher.

Furthermore, gains in producer prices which accelerated to 5.50% year over year through the end of January suggests that more gains may be in store for consumer prices in the coming months. After gaining ground the last five sessions, USDCNH Is now back on the retreat following the data which suggests this round of monetary easing has come to an end.

European Commission Upgrades Growth Outlook

Amid the rising political uncertainty encircling Europe, the European Commission released its latest economic projections for the Euro Area, upgrading its growth outlook for the region. Growth forecasts for 2017 have been elevated to 1.60% while 2018 GDP expansion is anticipated to come in at 1.80%. While inflation is not expected to return to the 2.00% targeted by the ECB mandate for “price stability”, it is forecast to rise to 1.70% this calendar year.

Furthermore, unemployment is projected to retreat to 9.60% during 2017 before falling to 9.10% in 2018. This upgraded viewpoint does give some cause for optimism, however, the report was quick to highlight the potential for political turmoil as a risk factor that could adjust the trajectory of the monetary union. After losing ground against the dollar for 3-straight sessions, the Euro is slightly higher in early Tuesday trade.

OPEC Reports Record Compliance

Although there were many analysts concerned by the viability of the OPEC deal and whether member nations would actually respect output quotas, OPEC reported record observance of the terms of the agreement. Over 890,000 barrels per day in output were reduced in January as the group makes continued efforts towards removing 1.200 million barrels in excess production.

Furthermore, adding to the sense of positivity were the optimistic demand growth projections which are anticipating global oil use to rise by 1.200 million barrels per day for the calendar year, outstripping previous years were growth averaged closer to 1.000 million barrels. However, demand projections were revised lower from an earlier 1.300 million barrels per day as new threats to growth emerge. Even after the more upbeat report was released, oil prices retreated, with WTI futures slipping back below $53.00 per barrel.

Advance German GDP Figures Miss Consensus

The German economy received a slew of downbeat figures earlier in the session, with preliminary fourth quarter gross domestic product data missing analyst expectations and the prior period’s results also revised lower. The advance figures for the last three months of the year came in at 0.40%, coming in under forecasts of 0.50% as third quarter figures edged lower to 0.10% from the 0.20% confirmed back in November.

In spite of a more competitive Euro which was a net positive for the German export economy, the trade surprisingly dragged on GDP results as domestic demand was underling as the primary driver of growth momentum. Adding to the more tepid outlook for the German economy was annualized growth which decelerated to 1.20%, printing well below estimates of 1.70%. The German DAX 30 is modestly higher on the session even after the disappointing GDP reading, extending Monday’s gains.